(June 8): The Reserve Bank of India’s use of a key tool for defending the rupee has passed the US$110 billion mark in recent weeks to a new record, according to people familiar with the developments.
The RBI’s net-short dollar book, a measure of the degree to which it has sold forward its stockpile of the US currency, has risen to about US$110 billion-US$115 billion across onshore and offshore markets, said the people who asked not to be identified as the information is private. The book was at US$95.3 billion in April, down from a record high of US$103.1 billion the previous month.
The central bank ramped up its interventions after the rupee weakened to a record low on May 20, almost hitting the 97 per dollar mark, the people said, adding that a large part of the central bank’s activity was in the offshore non-deliverable forwards market.
The RBI’s use of NDFs, which have grown over the past couple of years, allows the central bank to influence the exchange rate without immediately depleting foreign-exchange reserves. Such interventions can signal policy intent and help steady the currency during periods of volatility.
A spokesperson for the RBI didn’t respond to an email seeking comment.
The rupee has borne the brunt of the oil-price shock caused by the Iran war, as India depends heavily on imports to meet its energy needs. The currency has repeatedly fallen to record lows this year as refiners sold rupees for dollars to pay for costlier crude. Still, the currency may now find support from coordinated measures rolled out by the government and the RBI on Friday to attract capital flows.
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In recent weeks, the central bank has sold offshore dollars largely via short-dated contracts, typically maturing in one-to-three months, the people said. At the same time, it has conducted onshore swaps of maturities of more than a year, they said. These swaps replenish some of the liquidity drain caused by the RBI’s onshore dollar sales aimed at stabilising the rupee.
RBI Governor Sanjay Malhotra said on Friday that while the authority does not resist market-driven adjustments in the rupee, it curbs excessive volatility in the exchange rate. The currency is often influenced by speculative pressures that are not in sync with fundamentals, he added.
The growing derivatives book may still pose challenges. As contracts mature, they generate recurring demand for dollars, capping any sustained recovery in the rupee. The central bank is likely to use any renewed capital flows to unwind its short forward book and rebuild foreign-exchange reserves, according to Goldman Sachs Group Inc. analysts led by Kamakshya Trivedi.
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India’s foreign-exchange reserves were at US$682.3 billion in the week of May 29, having dropped more than US$40 billion since the Iran war began in late February.
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