RBI changes tack on forex intervention, focuses on forwards market
The RBI in April said all payments data should within six months be stored only in the country for ‘unfettered supervisory access’
Mumbai: The Reserve Bank of India (RBI) has changed tack in its foreign exchange intervention policy, increasing its participation in the derivatives market in relation to the spot market in an apparent attempt to avoid a cash crunch in the banking system.
The RBI sold $4.95 billion in the forward dollar-rupee market in August, its highest reported monthly sale this year, according to the RBI’s monthly bulletin. In July, RBI data showed no forwards market intervention at all.
In contrast to forwards, the RBI sold only a net $2.32 billion in August in the spot market, marginally above the $1.87 billion figure for July.
The rupee has weakened more than 14% since January, making it the worst hit currency in the region amid an emerging market rout. Domestic concerns around capital outflows, and a widening current account deficit due to the rising cost of crude oil imports have also hit the Indian currency.
While this prompted the government to raise import tariffs on several items, markets continue to fret about the outlook for the rupee after the central bank refrained from raising interest rates last week.
“Given that the RBI abstained from raising interest rates, it left a perception that the central bank was not too worried about the currency depreciation,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
“However, government clearly looks a lot more worried and the RBI may be expected to use its forex reserves more aggressively to manage the pace of the fall as key psychological levels draw near.”
The rupee started hitting a series of record lows in late July and on Thursday it touched another at 74.4850 to the dollar, spurring worries it will breach the 75 mark soon.
The RBI has sold nearly $19 billion from the forex reserves between April and August to stem the slide. That has drained roughly 1.4 trillion rupees from banks, creating a cash crunch.
Overall, the RBI has trimmed its spot currency intervention since July after selling about $14.4 billion in the three months since April, about 3.4% of forex reserves. India’s forex reserves stood at $400.5 billion as of 28 September, down from $424.36 billion at the end of May.
“This is an unusual situation where the RBI is choosing to intervene through the derivatives markets more than the spot,” said Anindya Banerjee, deputy vice-president of currency derivatives at Kotak Securities.
“We expect the RBI to continue intervening primarily through its forwards book rather than via spot to ease liquidity pressure.”
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.
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