Slowdown in the dollar inflows into debt and equities notwithstanding, the Reserve Bank of India’s large dollar purchases continued in March indicating the central bank prefers a weaker rupee due to a 13% overvaluation in terms of real effective exchange rate.
RBI bought $7.4 billion in March from the spot forex market while its net position in the forward market expanded to $8.3 billion from $5.8 billion in February. In March, the rupee was confined to a tight band of 61.80-62.80/$ as most of the incremental flows seem to have been absorbed by the central bank. Dollar inflows into shares and bonds slowed to $3.3 billion from $3.96 billion in February and $5.4 billion in January.
According to bankers, the central bank seems to be absorbing almost all inflows into the economy and not just foreign institutional investment. The rupee’s overvaluation with respect to a basket of currencies of 36 trading partners has prompted the RBI to intervene more frequently and more aggresively than before. “It is an attempt to prevent any appreciation of the rupee due to the income inflows,” said a foreign banker.
With exports shrinking and the threat of dollar outflows as the US Federal Reserve readies to hike interest rates later in 2015, RBI is perhaps building a safety net in terms of reserves.
Last week, a seperate data release showed the country’s forex reserves touched a fresh all-time high of $ 351.69 billion by rising a massive $7.3 billion in just a week.
Rupee has weakened 0.68% in May, far higher than the fall in other Asian currencies as foreign investors turned net sellers of bonds and equities. Foreign investors sold $942 million worth of bonds and $580 million worth of shares in May so far.