RBI stems Re; covers in forward mkt to thwart liquidity infusion

The Reserve Bank of India on Monday intervened heavily in the foreign exchange market to stem the rupee rise but in a major twist from the traditional method that would have infused rupee liquidity?due to the dollar buying?the central banker purchased forward dollars.

The forex market estimated RBI?s dollar-purchases to be at least $500 million. As a result of RBI?s forward bookings, premia for March and September shot up between 11 bps and 15 bps from Friday?s levels. March dollar-premium rose to 1.95% over the spot, while September was up at 1.54% over Friday?s closing level of 1.84% and 1.39% respectively.

?This, is probably the first time, the RBI prevented any immediate rupee infusion on its spot dollar purchases,?? said a chief dealer at a private bank.

The RBI usually purchases spot dollar which infuse rupees in the bargain creating a rupee glut in the money markets. This excess liquidity is later drained out of the system through its Market Stabilisation Scheme (MSS).

MSS, as is known, is when the RBI sells or auctions government bonds which add to the operational cost burden on the government in addition to interest payments. The centre, in the first week of this month, revised the outstanding limit, in government securities borrowings under MSS, to Rs 2 lakh crore from Rs 1.5 lakh crore. ? It appears, the RBI is now being tight-fisted on the MSS route and using other means of managing liquidity,?? said a senior banker at a government bank.

The RBI?s spot followed by immediate forward purchases is nothing but postponing liquidity injection for another future day.

?There were some rumours that last week too that the RBI had transacted similar purchases but now we are convinced about the same,?? said another forex broker. The rupee on Monday opened at 39.35/36 to the greenback and soon appreciated to 39.31/32 when government banks started making heavy dollar purchases, dealers said.

The rupee on Monday opened at 39.35/36 to the greenback and soon appreciated to 39.31/32 when government banks started making heavy dollar purchases, dealers said.

?As a result, the rupee was stuck at 39.30/31 for most of the day,?? said a treasury head at a foreign bank.

Prominent among the government banks that were major dollar-buyers was the country?s largest nationalised bank, the State Bank of India. Other buyers included Bank of Baroda and Bank of India, dealers said.