After selling dollars for the past few months, the Reserve Bank of India (RBI) may take a hands-off approach before its annual account closing by not trying to prop up the rupee as geopolitical tensions show signs of stabilising with global crude oil prices easing from its $140 peak.
The central bank was a net buyer of dollars between April and September, and then turned a net seller in the following months, the data released by the RBI showed.
The RBI continued to be a net buyer of $36.6 billion in this fiscal year — between April and January. In 2020-21, it purchased $68 billion on a net basis.
The central bank has been intervening aggressively in the currency markets since the Russian invasion of Ukraine last month, which resulted in global crude oil prices soaring.
India, which imports over 80 per cent of its oil requirements, was to be hit due to a surge in crude oil prices if the rupee was allowed to weaken.
The rupee reached an all-time low on March 7, hitting 76.97. Since then, the currency has appreciated around 1.5 per cent due to the RBI’s aggressive dollar selling.
The central bank’s intervention in currency markets, in addition to the sale of $5 billion in a buy-sell dollar-rupee swap auction on March 8, has resulted in the country’s foreign exchange reserves falling $9.6 billion — mainly due to an $11-billion decline in foreign currency assets — for the week ended March 11.
“In the $11-billion drop in foreign currency assets, $5 billion is on account of the sell-buy swap it did on March 8.
"So, on a net basis, the RBI would have sold $6 billion dollars during the week.
"However, if we exclude the valuation impact of dollar appreciation during the same period, intervention would not have been less than $4-4.5 billion,” said Amit Pabari, managing director, CR Forex.
Foreign exchange reserves are likely to fall further because the reverse leg of the 2019 buy-sell dollar-rupee auction of $5 billion is due on March 26.
The central bank is likely to adopt a more hands-off approach, and it will neither sell dollars, nor buy them, analysts said.
“The RBI would not be buying dollars immediately. But it will not be selling either.
"It will get active only when the rupee goes towards an all-time low.
"For it to buy dollars, the rupee would possibly need to go below 75,” said Anindya Banerjee, DVP (currency derivatives & interest rate derivatives), Kotak Securities.
One comforting factor for the central bank on inflation is that the government has not increased pump prices of petrol and diesel despite a rise in crude oil prices even after the Assembly elections are over.
“With oil at 100, commodity prices are increasing across the board.
"Inflation risk is pretty high. In that kind of situation, the RBI may allow the rupee to appreciate a bit to cushion the impact of inflation,” Banerjee said.
“We also expect the RBI to intervene again on the buy side once the rupee reaches close to 75.50 to 75.80 as it will not allow strong appreciation to protect its profits on the year’s closing date,” Pabari said.
A higher level of foreign exchange reserves helps the RBI to generate higher surplus funds — a part of which is transferred to the government.
Despite the recent fall in foreign exchange reserves, India continues to be the country with the fifth-highest level of reserves.
In the past two years, more than $150 billion was added to the foreign exchange kitty.
The level of reserves has risen from 16 per cent of GDP at the end of March 2013 to the current level of 20.5 per cent.
“The import cover provided by the reserves on a prospective basis has doubled while short-term external debt on a residual maturity basis has declined over the same period from 59.0 per cent of reserves to 40.3 per cent.
"In addition, there are second lines of defence in the form of forward assets and swap lines,” RBI Deputy Governor Michael Patra said in a recent address while pointing to the strength of India’s external sector due to the buffer provided by the holdings of foreign exchange reserves.
