India’s central bank appears to have stepped up intervention in the futures market to slow the rupee’s fall and preserve its hard-earned reserves.
According to estimates by DBS Bank Ltd Standard Chartered Plc, the Reserve Bank of India has reduced its forward-dollar book from $12 billion to $15 billion at the end of April by about $64 billion. Said that the Authority has made significant interventions through further means.
The move suggests the central bank is removing all halts to contain losses in the currency, which set a series of record levels this month and threatened to further accelerate inflation. According to Standard Chartered, the RBI’s intervention strategy has slashed the dollar-rupee one-year annual forward premium to below 3% for the first time in a decade.
Amit Pabri, managing director, CR Forex, said, “When the rupee is under pressure, instead of falling more in reserves, they are now clearing those dues.” He said the forward was created to mitigate the impact of incidents like now.
Emerging market currencies are under increasing pressure as Federal Reserve interest rate hikes push funds from developing economies to the US. The rupee has depreciated over 5% this year and set a new all-time low of 78.3862 on Wednesday.
A large forward dollar book acts as an additional buffer in the hands of RBI over and above the spot reserve. Governor Shaktikanta Das has said that the central bank uses a multi-pronged intervention approach to reduce the actual outflow of the dollar.
The strategy works largely like this: When the RBI intervenes in the spot market to prevent losses in the rupee, it sells dollars and buys rupees, thereby reducing interbank liquidity. And, then the spot settlement date does what is commonly known as a buy-sell swap to offset the liquidity effect in the forward market.
Most strategists continue to bear down on the rupee this year amid an outflow of $27 billion from the Indian stock market. Bank of America expects the currency to drop to $81 per dollar by the end of the year.
Parul Mittal Sinha, Head of India Financial Markets at Standard Chartered said, “In the current global scenario where the dollar remains strong and rising commodity prices negatively impact India’s current account dynamics, we may have a bearish outlook on the rupee. perspective.”