The Reserve Bank of India, which has aggressively been buying dollars to arrest a sharp appreciation in the rupee, is more likely to intervene in the forward market than the spot market to ensure that the rupee liquidity in the banking system does not spike, sources said. Surplus liquidity in the Indian banking system shot up after the government demonetised Rs 500 and Rs 1,000 notes last November. The current level remains elevated despite the RBI’s effort to absorb excess cash due to massive government spending. According to RBI data, the daily average overall surplus liquidity in the banking system was Rs 4.2 lakh crore in April and Rs 3.5 lakh crore in May. “If the RBI buys $2 billion in the spot market, after 2 days, it will inject rupees worth 2 billion into the system. Forex management is one job and monetary policy is another, and the aim is to minimise the impact of one on the other,” a source with knowledge of the development said.
The latest data on the central bank’s purchase or sale of dollar confirms this trend. In April, the RBI’s outstanding net forward purchases stood at $13.55 billion, up from $10.84 billion in the previous month. On the other hand, net purchase in the spot market dropped to $0.57 billion in April from $3.54 billion in March. The RBI publishes data on the sale and purchase of dollar with a lag of two months.
The RBI has been buying dollars almost on a daily basis and at various levels to prevent the rupee from sharply gaining against the dollar. The local currency, which has gained more than 5% against the dollar since the beginning of the year, is seen appreciating further in near term. Traders said it is possible for the rupee to go as high as 63.80-75 against the greenback in the next one month on the back of robust foreign fund inflows, if the RBI allows it to appreciate.
If the rupee breaks the 63.80-75 level, it has potential to climb as high as 63.25 against the dollar, but again, it would depend on RBI’s interventions. On Monday, the rupee closed at 64.44 against the dollar.
The RBI’s intervention has helped India’s foreign exchange reserves hit record levels four times since April. As on June 2, foreign exchange reserves were at a life-time high of $381.2 billion, up 5.8% since the beginning of the year. The increase in reserves is an indication of the central bank’s dollar purchases.
The RBI maintains that it does not want to influence the exchange rate for the rupee, but would take steps, including intervention in the spot and forward markets, to curb extreme volatility. A sudden appreciation in the rupee could be negative for exporters, and they could see their competitiveness decline, traders said, adding that the RBI would not want such a situation to arise.
“The liquidity is already in a surplus mode, and if the RBI continues to inject liquidity because of its dollar purchases, the overnight rates could go below the policy rates,” a foreign exchange trader with a private bank said.
The RBI has auctioned T-bills worth Rs 1 lakh crore under the market stabilsation scheme, sold cash management bills worth Rs 70,000 crore and conducted variable rate reverse repo auctions to absorb surplus liquidity averaging Rs 3.8 lakh crore in April and Rs 3.4 lakh crore in May.
Along with narrowing of the LAF corridor to 25 basis points from 50 basis points, it has been able to keep the weighted average call money rate broadly within the corridor.
By Shamik Paul