The deluge of short-term dollar inflows into Indian debt seen in the recent months doesn’t seem to have perturbed the Reserve Bank of India (RBI) this time around.
For the first time in 2013-14, the RBI did not buy dollars at all from the foreign exchange market, data from the central bank showed.
The RBI bulletin shows that, in February, the central bank sold $530 million in the forex market, but didn't buy any. In the previous months, the central bank has been both on the buying and the selling sides of the market as the situation demanded.
Foreign institutional investors had poured $2.5 billion into the debt market and most of the inflow had been through purchase of short-term treasury bills and commercial papers.
In fact, FIIs had exhausted their investment limit in treasury bills and overshot it in commercial papers.
The Indian rupee had appreciated 1.33% on the back of these short-term flows. The currency has gained 2.85% so far in 2014 and ended at 60.18/$ on Friday.
The central bank’s complete absence from the buying side at a time of bulky short-term flows comes as a surprise as the RBI has reiterated several times that it intervenes to reduce volatility in the exchange rate.
Market participants said that perhaps for the central bank, the appreciation of the rupee was not sharp enough to warrant intervention.
“There were indeed heavy short-term flows in the last couple of months. But essentially the rupee has not appreciated very sharply as it is still around 60/$,” said the treasury head of a foreign bank.
Instead of a tactical intervention, the RBI has opted for a more substantial tool to curb short-term debt inflows. The central bank banned FIIs from buying short-term treasury bills earlier this month and nudged them towards the longer end of the yield curve.