Perhaps taking a lesson from past experience, the Reserve Bank of India has mopped up almost the entire $32-billion net dollar inflow into domestic debt market during April-December, data show.
The RBI bought a massive $29.2 billion from the spot exchange rate market during April-December, and its outstanding position in the forward market was $6.85 billion. In all, the RBI has bought a whopping $75 billion from the forex market.
Foreign institutional investors have increased their holdings of Indian domestic bonds by a net $32 billion to $66 billion so far in financial year 2014-15, the highest investment since liberalisation.
The RBI’s interventions have kept the rupee from appreciating sharply even as the debt market received huge inflows. The rupee closed at 62.19/$ on Tuesday and has appreciated just 3.84% so far in FY15.
The spot market intervention this time is the highest dollar purchase during the first nine months of a financial year by the RBI since 2007-2008.
The RBI had to face a tough time during May-November 2013 when FIIs pulled out a massive $12 billion and sent the rupee tumbling to an all-time low of 68.85/$ on August 22 and bond yields surging 100 basis points.
FII investments in debt tend to be more volatile and are considered “hot money” as investors chasing yields could quickly reverse their purchases during unflattering circumstances.
Through its aggressively dollar purchases, the RBI has shored up the country’s forex reserves to an all-time high of $328 billion as of January end.
But the RBI may very well continue its dollar purchases if one goes by deputy governor HR Khan’s statements. While noting that the country’s forex reserves are indeed at a comfortably high level, Khan said that “no amount of reserves would be enough during external shocks”.
Indeed, currency dealers said that the central bank has been present “almost everyday” in the forex market in January as well. During January, reserves have risen by $8 billion, indicating that the central bank’s dollar purchases have not abated.