Does the government interfere with the rupee dollar markets and why does it do that?

The INR, while not exactly convertible, is not subjected to government intervention in a big way. But the RBI does make an effort to maintain the INR in a tight trading range so that importers and exporters are not subjected to shocks. For example, if the RBI defines its range as 64-66/$, then the RBI will start selling dollars around 66 levels and start buying dollars around the 64 levels. Currently, the RBI not only directly intervenes in the currency spot markets but also hedges its exposures through the currency derivatives market. It is only in times of extreme volatility or in the event of a global crisis that the RBI intervenes in a big way in the INR market. For example, when the rupee was deprecating in the last couple of months, the RBI first moved in to protect the rupee at 70, then at 72 and finally it stoutly defended the rupee at 75/$. The RBI defends the rupee through the spot market and the futures market. The RBI also intervenes if the rupee is getting too strong as that could have negative repercussions for exporters and therefore the trade deficit. The value of the INR is a combination of a plethora of factors. Domestic factors play a key role in determining the value of the rupee. But a lot also depends on what happens outside India, something that is not entirely in the control of the RBI!