For two straight months, the Reserve Bank of India’s forward dollar/rupee purchases have jumped while its intervention in the spot market has dropped, signaling a shift in the central bank’s intervention strategy.
The September bulletin of the RBI shows that it has piled up an outstanding $4.6- billion forward dollar/rupee contracts as of July, which is an increase of $2.7 billion over two months. In contrast, the RBI bought about $169 million in July, far lower than the previous two months.
In July, the rupee had been largely in a range despite the pressures from the Greece debt crisis, thereby reducing the need for the RBI to intervene heavily in the spot market. The currency had moved in 63.20-64.00/$ band in July and instances of interventions by the RBI were few.
However, the forward market provided the opportunity to the RBI to not only drain domestic rupee liquidity (which had moved from deficit to surplus) but also to fortify forex reserves. Further, intervention in the spot market tends to increase liquidity immediately.
In July, banks on an average were parking around Rs 5,000 crore with the RBI through its daily reverse repo tender as against being net borrowers from the central bank through its repo tender until May. A sharp increase in liquidity could lead to big fall in money market which may, in turn, go against the central bank’s policy on inflation.
In August, RBI governor Raghuram Rajan said that the central bank has around $20 billion in forward contracts in addition to forex reserves to use when the rupee gets volatile owing to external shocks. The rupee had hit a fresh two-year low on Monday and has been going down since August. The central bank details its forex interventions with a lag of two months.