RBI to the Rescue Again, Offloads Greenbacks

RBI to the Rescue Again, Offloads Greenbacks

Sells Dollar 400-500 m in onemonth futures contracts and an almost equal amount in the spot market

Two weeks after South Block had decided to swap high-denomination bills in the autumn of 2016, the rupee came within touching distance of the 69 mark to the dollar. On Thursday, it breached that level, reportedly requiring the central bank to enhance supplies of the world’s reserve currency to prevent the local unit’s rout.

During the day, the rupee hit a record low of 69.09, sliding past its earlier trough of 68.86, reported on November 24, 2016. In early trading Thursday, the Reserve Bank of India (RBI) is said to have sold Dollar 400-500 million in one-month futures contracts. Later, Mint Street sold an almost equal amount in the spot market, some dealers said. The RBI could not be contacted immediately for comments. Such moves collectively helped the local unit erase some of its early losses. The rupee closed at 68.79 on Thursday, versus 68.63 a day earlier.

“The RBI is suspected to have sold dollars both in futures and spot markets,” said Anindya Banerjee, currency analyst at Kotak Securities. “The rupee cannot stay immune when other emerging market currencies are sliding against the dollar. But RBI intervention was sharper earlier in 2013 when India’s macro fundamentals were weak.” Five years ago, the Indian economy was struggling to gain momentum amid a raft of domestic uncertainties. But why did the RBI choose the futures market?

The central bank normally intervenes in the spot market to curb wild swings in the currency. However, such moves increase or reduce rupee liquidity or available cash in the banking system, distorting inflation dynamics and bond yields — factors that shape the RBI’s monetary policy stance. Over the past few months, the benchmark bond yields have been rising. It pierced the psychological mark of 8%, raising overall borrowing costs. Such moves called for more open market operations (OMOs), a market matrix that helps bring down yields. Under OMO purchases, the RBI buys bonds infusing liquidity in the system. If the central bank were to conduct more spot market interventions of selling dollars and buying rupees, such moves could affect the effectiveness of the OMO.

“The intensity toward the spot market intervention was relatively low, while the futures market makes sense for the RBI,” said the treasury head at a large bank. All other emerging market currencies, including the Chinese yuan, have lost value to the dollar with investors seeking the safety of US assets.

The Economic Times, 29th June 2018, New Delhi