The Reserve Bank is intervening in the currency market without hurting the reserves and domestic liquidity. It has gone slow on its spot foreign exchange market intervention in September.
It sold only $ 1 billion in spot market, but sold $7 billion in forward, according to the latest date released by the central bank. In comparison it sold $ 6 billion in spot and $ 5 billion in forward in August.
The Reserve Bank has been aggressively selling dollars in the spot as well as forward markets since January this year. This is because the rupee has been losing value as foreign investors started pulling out investments from emerging markets including India following the rate hike since last December.
The September intervention policy is significant because the rupee had touched a new low touching close to Rs 75 to the dollar as rising crude prices too put pressure on the currency. Also, the domestic markets faced tight liquidity conditions due to the problems faced by the NBFCs to repay their short term liabilities. “The central bank’s policy to intervene more in forward than in spot at such times is a prudent measure” said Soumyajit Neogi, Associate director at India Ratings. “It manages the value of the currency without hurting the reserves as well as domestic liquidity” .
Whenever a central bank intervenes in the spot market, there is a direct impact on both the level of domestic liquidity as well as the foreign currency reserves. This is because the central bank draws on its reserves and sells them in exchange of rupee liquidity, when it sells dollar in the spot market. But in a forward contract there is no physical transfer of currency for a pre-decided period. If need be these contracts can be rolled over and avoid use of physical currency.
The combined spot and forward dollar intervention in the first half of the fiscal is over $30 billion. India’s foreign exchange reserves have dipped by $30 billion so far till early November. Any sharp drawdown of reserves could put pressure on other external sector indicators such as import cover of reserves and the ratio of short-term debt to reserves.
But there estimates that the Reserve Bank is likely to have stepped up its spot intervention in October. “Headline forex reserve data for the week ended 12 October indicates that the Reserve Bank of India intervened heavily in the spot market” said a report by Standard Chartered Bank. ” We estimate the spot intervention for this week at $5.9bn, the heaviest in the past decade”.
Source: economictimes.indiatimes.com