RBI shifts forex intervention focus from forward to spot

Data show RBI sold $921 million in the spot market in November — most in a year. In contrast, RBI didn’t intervene in the forwards and in fact had unwound some of its positions there.

The outstanding position of RBI in forwards slipped to $13.54 billion in November from $14.08 billion in October.

RBI chooses to intervene in the forex market through forward contracts to postpone the impounding of rupee liquidity due to its dollar sales. “It depends on how they project liquidity to be, as when delivery is taken for the forwards contract, it will tighten liquidity then,” said Abheek Barua, the chief economist at HDFC Bank.

“Intervening in the spot market is a better way especially when you have room in terms of liquidity,” he added.

An intervention in the spot market not only affects the currency immediately, but also affects banks’ liquidity as RBI impounds rupee when it sells dollars. Heavy intervention during November 2011-January 2012 had led to worsening of the liquidity deficit and banks started borrowing over R1.5 lakh crore from RBI’s repo tender. This prompted RBI to intervene in the forwards market more therafter.

Now a year later the liquidity situation seemed to have given more elbow room to the RBI for intervening in the spot market again.

In the beginning of November 2012, banks' borrowings from

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