RBI builds Rs 31 bn forwards position as dollar tide rises

RBI builds Rs 31 bn forwards position as dollar tide rises

The Reserve Bank of India (RBI) has built upa Rs 31billion position in rupee dollar forwards as a continuous foreign fund inflow has necessitated active intervention by the central bank in the spot market.Forwards contracts are designed to buy foreign currencies at preagreed prices.

A buyer has to payafee, the forward premium, for the right to buy at that price.Economists and currency dealers said the RBI action could also beaform of insurance against an outflow of dollars as central banks around the world had begun normalising their easy money policie

In August and September, the markets witnessed outflows from the equity markets, highlighting the need to remain cautious on funds flow.Foreign investors brought Rs 31.33 billion into India in 2017, of which Rs 22.6 billion has moved into debt

This is almost equivalent to the RBI´s net forward position of Rs 31.13 billion, as of September.Of this, Rs 3.44 billion matures within months and Rs 28.2 billion withinayear. In the more than a year segment, the RBI hasa ´sell´ position of Rs 981 billio

The RBI´s foreign exchange reserves have swelled to over Rs 400 billion.With the current account deficit at a manageable level, the central bank is building reserves but it is not willing to increase liquidity by outright dollar purchases.The RBI mops up incoming liquidity by buying dollars, releasing an equivalent amount of rupees.

This can stoke inflation.Therefore, while buying spot dollars, the RBI also sells them over several tranches and buys dollars in the forwards market where physical delivery is not necessaryThese contracts are also squared off by slowly selling dollars in the forwards market

This helps the central to stabilise the exchange rate as well. “The RBI does not need to intervene always in the spot market.Whenever it buys or sells in the immediate term forwards market, say one or two months from spot, the market getsasense of the RBI´s mood and adjusts positions accordingly,” said Satyajit Kanjilal, managing director of ForexServe.

Importers are at present not buying forward premiums while exporters are selling them more than their underlying exports positions would suggest.With a stable or appreciating rupee, importers are not interested in being locked up at a particular exchange rate. “The RBI now has a problem of plenty

As it intervenes, its forwards position swells,” said Abhishek Goenka, managing director and chief executive officer of IFA Global.He said whenever the rupee depreciated to 65 a dollar, the RBI was squaring off its forwards position.With an appreciating bias to the rupee, the RBI had to keep raising its exposure in the forwards market, he added.

“Some accumulation in the forwards market is a compulsion for the central bank, but some of it could be conscious.It could beaform of insurance in case the fund flow reverses in the next year,” said the chief economist of a private bank.The economist pointed out exporters were over hedging and by being the dominant player in the forwards market, the RBI was controlling forward premiums.

Exporters, as suppliers of dollars, earn by selling forward premiums to importers.“The RBI´s target seems to be the real effective exchange rate (REER) of the rupee.It is closely watching the yen and the yuan and does not want the rupee to be overvalued or under valued beyond a certain extent,” Kanjilal said. The REER isameasure of the rupee´s relative strength against competing currencies.

On a 36 currency basis, the REER was 119.57 now, slightly lower than 119.61 in September.A figure above 100 indicates strength of the rupee.

The Business Standard, New Delhi, 5th December 2017

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