RBI May Have Boosted Forwards Intervention To Check Rupee Fall, Save Reserve

The RBI has run down its forward-dollar book by $12 billion to $15 billion from about $64 billion at the end of April, according to estimates by DBS Bank and Standard Chartered

The RBI’s intervention strategy has caused dollar-rupee one-year annualised forward premiums to fall below 3 per cent for the first time in a decade, said Standard Chartered.

The Reserve Bank of India (RBI) seems to have ramped up intervention in the forwards market to slow the rupee’s decline and preserve its hard-earned reserves, Bloomberg reported.

The central bank has run down its forward-dollar book by $12 billion to $15 billion from about $64 billion at the end of April, according to estimates by DBS Bank and Standard Chartered said the regulator has significantly intervened through forwards.

The RBI is keeping no stones unturned to restrict losses in the currency, which set a series of record lows this month and threatens to slip further down due to surging inflation.

According to Standard Chartered, the RBI’s intervention strategy has caused dollar-rupee one-year annualised forward premiums to fall below 3 per cent for the first time in a decade.

“When there is a pressure on the rupee, instead of dipping into the reserves much, they are now liquidating those outstanding forwards,” said Amit Pabari, managing director at CR Forex. The forwards were built to cushion the impact of events like now, he added.

According to the report, pressure is mounting on emerging-market currencies as the US Federal Reserve’s interest-rate hikes spurs fund flows to the US from developing economies. The rupee has declined more than 5 per cent this year and set a fresh all-time low of 78.3862 on Wednesday.

On Thursday early trade, the rupee inched higher by 9 paise to 78.23 against the US dollar, recovering from its record low.

At the interbank foreign exchange, the rupee opened at 78.26 against the American dollar, then inched higher to quote at 78.23, registering a rise of 9 paise from the previous close.

RBI Governor Shaktikanta Das has said the central bank uses a multi-pronged intervention approach to minimise actual outflows of dollars.

The strategy largely works like this: When the RBI intervenes in the spot market to curb rupee losses, it sells dollars and buys rupee, depleting interbank liquidity. And, then on the spot settlement date does what is commonly known as a buy-sell swap in the forwards market to offset the liquidity impact.

Most strategists continue to be bearish on the rupee amid $27 billion of outflows from Indian equities this year. Bank of America expects the currency to slide to 81 to a dollar by year-end.