RBI Turned Net Seller of Dollars in Oct to Defend Re

India’s central bank emerged as a net seller of dollars both in the spot and forward markets for the first time in 10 months in October, indicating pressure on the local currency.

Although the amounts are still not high, this may slow reserves accumulation, and also help Mint Road manage liquidity as it is on the way to normalize the extra ordinary liquidity support to fight the Covid-19 crisis.

The Reserve Bank of India (RBI) 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, latest data indicate. It also sold $500 million in the month. This is the first time in 10 months that the central bank has turned a net seller in both the sot and the forward markets.

The central bank has been dealing with pressure on the rupee ever since the US Fed indicated going slow on bond purchases that could make money costlier.

India’s foreign exchanges reserves increased since April 2020 adding $167 billion until end August, with one of the fastest reserves pileups remaining flat up since September. Besides some foreign portfolio investments withdrawals, dollar demand has also risen due to a sharp rise in the global crude and commodity prices.

Economists have already factored in a higher current account deficit for the current financial year.

But a slowdown in foreign exchange reserves could be a boon for the central bank. Going by the November import numbers, the reserves are adequate to fund 12-13 month’s imports.

Moreover, a slowdown also implies slower conversion of forex reserves into rupee liquidity.

Daily absorption through the fixed rate reserves repo and the variable rate reverse repo (VRRR) operations under the liquidity adjustments facility (LAW) averaged Rs 8.6 lakh crore in October-November.

“The central bank has been somewhat asymmetric in its intervention behavior in the last two years,” said Rahul Ajaria, chief India economist at Barclays Capital. “But we expect it to stabilize the currency if needed because its intervention will lead to some liquidity withdrawal, which is consistent with domestic monetary policy needs.” S -ET

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