RBI gets more aggressive in forward market intervention

RBI gets more aggressive in forward market intervention

MUMBAI: The Reserve Bank has been more aggressive in the forward market intervention off late to rein in the local liquidity impact of dollar purchase. The central bank’s combined dollar purchase since May amounted to $125 billion until January, with $49 billion purchase in the forward markets.

Data from the RBI bulletin shows that the bank purchased $7.6 billion in the forward market in January, while its net purchases in the spot market amounted to $2.9 billion. Analysis of the spot and forward forex intervention data by the Reserve Bank shows than since April’20 indicates that the central bank has been the central bank started getting active in the forward market since August and its forward purchases have far exceeded it net spot purchases since November. And the combined spot and forward intervention May and January amounted to $ 125 billion.

Economists attribute and link this intervention strategy by the central bank to its liquidity management policy. “Since the RBI signalled a gentle turn in its liquidity policy, a change has come about in its forex intervention behaviour as well” said Rahul Bajoria, chief India economist at Barclays Capital. The central bank has been infusing liquidity in the system through various bond buy-back programmes as a stimulus to revive the economy following the impact of the COVID induced nation-wide lockdown.

But banks have parked the surplus funds back with the central bank in reverse repos. Surplus funds parked with RBI is estimated at Rs 8 lakh crore. Buying dollar in the spot add to the rupee liquidity in the system as the central bank buys dollars from the market and infuses rupee liquidity in return. But if it buys dollars in forward market, the central bank does not have to infuse rupees. “By buying the dollar in the forward market, the RBI is sending a message to the market that it is not going to infuse liquidity” said Madan Sabnavis, chief economist at


Besides, because of its concerns over imported inflation on account of rising out of rising crude and commodities prices, the RBI has letting the rupee appreciate very gradually over the past four to five months. This according to Rahul Bajoria, India economist at Barclays Capital was possible as the bank switched its intervention from the spot market to the forward market, and then through a likely slowdown in its interventions. “We think a major factor behind the decision to allow faster INR appreciation in recent months has been the growing size of the RBI’s forward book, and the surge in forward points” Bajoria said. According to the latest monthly bulletin, in terms of the 40-currency real effective exchange rate (REER) index, the rupee appreciated by 2.4 per cent in February 2021 over its level in March 2020.

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