RBI may have bought $8 billion from market in less than a month

The Reserve Bank of India (RBI) is estimated to have bought more than $8 billion from the market in less than a month, simultaneously boosting the foreign-currency stockpile and enhancing rupee liquidity by as much as ₹67,000 crore since the Diwali week.

India’s foreign-exchange reserves, which declined about $100 billion since February this year, have begun climbing over the past few weeks. Reserves rose at their fastest pace in more than 14 months for the October 28 weekend. Indications are that after some contraction in the next seven days, they have risen again in the week to November 11.

“In recent weeks, as the US dollar has lost momentum, the RBI is gaining reserves, primarily from revaluation gains and perhaps also some opportunistic buying,” said Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays. “This, along with slowing imports, will allay fears of deteriorating import cover ratios.”

With an addition of another ₹32,000 crore in base money since November 4 by way of net foreign exchange assets of the RBI, foreign exchange absorption by the central bank over the past four weeks could exceed $8 billion.

‘Balancing Twin Objectives’

Addition of net foreign exchange assets to the reserve money, or base money, amounted to Rs 67,000 crore between October 21 and November 11 of this year. Base money reflects more than 90% of the central bank’s foreign exchange stockpile.

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The central bank’s strategy to buy US dollars is also helping Mint Road ease domestic liquidity, leading to a greater degree of comfort on short-term interest rates after they had climbed over concerns of tighter money supply.

“The RBI has been balancing the twin objectives of both stabilising the forex reserves to provide confidence to the forex market while at the same time ensuring that liquidity remains adequate,” said Madan Sabnavis, chief economist, Bank of Baroda. “Hence, it has bought more than $8 billion in the market and also infused liquidity simultaneously to balance out the two. This is in alignment with the central bank’s basic objective of curbing volatility in the markets.”

Pressure on the exchange rate is expected to ease further in the coming months as global crude and commodity prices head south. Odds have also shortened on a slowing pace of future interest rate increases in the US as inflation in the world’s biggest economy shows signs of moderation.

The rupee, which had lost about 10% against the US dollar since January, has recouped some of its losses in recent weeks amid indications that overseas investors are beginning to buy into Indian assets on expectations of robust economic growth.

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