Mumbai: The Reserve Bank of India (RBI) significantly stepped up its foreign exchange intervention last week, selling an estimated $8 billion to $15 billion to support the rupee, according to bankers familiar with the central bank’s market operations.
The intervention comes as the RBI gains greater room to manage currency volatility following a surge in dollar inflows triggered by recent policy measures. Six bankers cited by Reuters estimated that the central bank sold at least $8 billion during the week, with one banker putting the figure as high as $15 billion.
The RBI’s intervention helped the rupee strengthen to 94.2850 per US dollar on September 3, its strongest level in more than two months. The currency had fallen to a record low of 96.96 in May, highlighting the extent of its recent recovery.
A key source of the increased dollar inflows has been the RBI’s policy measures, including a discounted hedging facility for overseas borrowings by state-run companies and banks, as well as a zero-cost hedging facility for banks raising foreign currency deposits overseas. These measures have attracted more than $136 billion in inflows, providing the central bank with greater flexibility to sell dollars in the market.
India’s foreign exchange reserves have also strengthened considerably. Reserves stood at a record $740.8 billion as of August 21, while J.P. Morgan estimated they may have subsequently crossed $750 billion.
However, analysts caution that the rupee’s recent gains may not signal the beginning of a sustained appreciation cycle. Goldman Sachs expects the currency to remain within a relatively narrow range in the medium term, despite improving external balances.
The RBI’s dollar sales also absorb rupee liquidity from the banking system. This could help prevent excess liquidity from pushing interbank borrowing rates below the policy rate, thereby supporting the transmission of monetary policy.
Bankers said importers have increased forward dollar purchases to protect against future depreciation, while exporters have been reluctant to sell dollars amid expectations of better exchange rates.
The RBI is also expected to use future inflows to reduce its forward foreign-exchange liabilities, which economists estimate have crossed $200 billion.
