The Reserve Bank of India sold $7.85 billion and bought $7.75 billion in the spot market in October, resulting in net dollar sales of $100 million during the month, the latest RBI data indicated. It also sold $500 million in futures markets during the month. This is the first time in ten months that the central bank has become a net seller in both the spot and futures markets.
Central bank dealing with pressure Rupee Ever since the US Fed signaled a slow move on bond buybacks, that could cost money. India’s forex reserves, which had been gaining momentum since April 2020, have remained flat since September, with the fastest reserves pile-up, adding $167 billion by the end of August. Apart from some pullback by foreign portfolio investors, sharp rise in global crude oil and commodity prices has also fueled demand for the dollar, which remains volatile in prices. Economists have already forecast a higher current account deficit for the current fiscal.
But a slowdown in foreign exchange reserves can prove to be a boon for central banks. As per November’s import data, the reserves are sufficient to fund 12-13 months of imports, leaving India in a far better position than it was in 2013’s taper tantrums.
Besides, it also implies slow conversion of foreign exchange reserves into liquidity of the rupee. reserve Bank of IndiaNet foreign exchange assets of the company have added Rs 4.43 lakh crore to reserves in the current fiscal, one of the key drivers of domestic liquidity. According to Governor Shaktikanta Das in the latest monetary policy statement, daily absorption through Fixed Rate Reverse Repo and Variable Rate Reverse Repo (VRRR) operations under the Liquidity Adjustment Facility (LAF) averaged Rs 8.6 lakh crore in October-November. The liquidity impact of higher dollar flows will be even greater adding challenges to liquidity management and policy normalisation.
“The central bank has been somewhat asymmetric in its interventionist behavior over the past two years,” said Rahul Bajoria, India’s chief economist at Barclays Capital. But we expect it to stabilize the currency if need be, as its interventions will lead to some liquidity evacuation, which is in line with domestic monetary policy needs”.
In addition, the slow accumulation of reserves restricts the pace of growth of the central bank’s balance sheet and capital provision to that extent.