Given that the rupee liquidity in the banking system has been entering into surplus mode, the Reserve Bank of India (RBI) had shifted its strategy...
Given that the rupee liquidity in the banking system has been entering into surplus mode, the Reserve Bank of India (RBI) had shifted its strategy of intervention by buying dollars more in the forward market to delay further infusion of liquidity, data from the central bank showed on Monday.
The RBI bought only $565 million from the spot dollar/rupee market in June but its net outstanding forward market position went up to $2.59 billion from $1.8 billion in May. The central bank had been buying dollars aggressively from the spot market until May. Dollar purchases in the forward market delays the infusion of rupee liquidity to an advanced date as against a spot market transaction where the infusion is within two days.
In April and May, the RBI had brought down its net position in forward market by taking delivery of its dollar purchases, thereby infusing liquidity into the banking system. The central bank seems to have shifted back to forward dollar purchases in June perhaps anticipating a surplus liquidity situation. The improvement in liquidity is evident from the fact that banks have been parking funds with the RBI through various reverse repo tenders rather than being net borrowers.
For instance, banks had parked Rs 60,464 crore with the RBI on Friday but had borrowed only Rs 31,563 crore from the central bank through repo tenders. Banks have become net lenders to the RBI from being net borrowers. The surplus liquidity has brought down money market rates including the overnight call money rate to below the policy rate of 7.25%. On Monday, the call rate had touched 6.70% intraday.
It is clear that the central bank would want to keep buying dollars to shore up forex reserves, keep the competitiveness of the rupee and also to curb volatility in the market.