RBI in balancing act as overseas inflows rise

The rupee?s sharp appreciation because of a surge in foreign exchange inflows in July-September forced the central bank to intervene for a second time in the fiscal year and highlighted the country?s ongoing struggle with bountiful inflows.

The country?s balance of payment, which will show higher surplus in July-September, is singularly marked by higher overseas inflows as receding worries on the euro zone?s sovereign debt crisis and higher growth potential of emerging countries including India bolstered global investors? risk appetite.

In July-September the second quarter of the current fiscal year, portfolio investors poured $26.98 billion of funds in equity and debt.

Mirroring the inflows, the local unit climbed 3.5% against the dollar in July-September erasing much of the 4.5% fall in the previous three months.

While in April-June quarter RBI bought and sold dollars as part of its intervention in the foreign exchange market, in September it only bought dollars, indicating its efforts to slow the rupee?s upward movement.

In September, RBI bought $260 million while in June it bought $370 million and sold $260 million.

In October, when portfolio investors poured over $10 billion into Indian markets, RBI bought $450 million.

Apart from intervening in the spot dollar/rupee market to prevent a sharp spurt in local unit, RBI has also been buying dollars in the forward market to remove volatility and continued supply of the greenback.

Economists and industry officials feel RBI will continue to intervene in the forex market as overseas inflows are likely to increase.

?Currently, we have seen a significant surge in FII inflows and the prime reasons for that are interest rate differentials and improving fundamentals of the economy as against other economies,? said Arun Singh, senior economist at Dun and Bradstreet.

?These two factors are not going to come down in short period of time. So, for the remaining part of the (fiscal) year, I am expecting a significant increase in inflows,? he said.

Union Bank of India?s General Manger S. Rajendran foresees inflows to continue into the next fiscal year as problems in European and the US markets are likely to persist.

?With accommodative policies of European and US central banks and India being good performer in terms of returns and basic economic factors being very positive, we can expect inflows to continue to be here,? he said.

The confidence of higher appetite of overseas investors in domestic assets has prompted the Indian government to double the cap on FII investments in government bonds to $10 billion and hike the investment limit in corporate debt to $20 billion from $15 billion.

India too feels confident that the higher inflows could be absorbed by the country?s high growth which needs big investments. But higher inflows also could mean frequent RBI intervention in foreign exchange market, experts said.

?Whenever there is an excess inflow or if there is pressure on rupee, RBI will intervene in the market,? said Singh of Dun and Bradstreet.

He expects RBI will intervene one or two times before this financial year ends in March.

RBI as a regulator has to manage inflation, interest rates and exchange rates, and whenever any variable goes up and down, they intervene in market and try to correct it, he added.

?As far as foreign exchange market is concerned, RBI has said whenever there is lump (in flows) they will try to absorb that lump so it doesn?t have an immediate impact on rupee. If there are large lumps coming in possibly they will intervene,? Union Bank?s Rajendran said.