India’s central bank appears to have stepped up intervention in the futures market to slow the decline of the rupee 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 portfolio by $12 billion to $15 billion, from about $64 billion at the end of April. said the authority has intervened significantly through forwards.
The move shows that the central bank is pulling out all the stops to curb losses in the currency, which hit a series of record lows this month and threatens to accelerate inflation further. The RBI’s intervention strategy has resulted in dollar-rupee one-year term premiums falling below 3% for the first time in a decade, according to Standard Chartered.
“When there’s pressure on the rupee, instead of diving into reserves a lot, they now liquidate those outstanding forwards,” said Amit Pabari, managing director at CR Forex. The attackers are built to withstand the impact of events like this one, he added.
Pressure on emerging market currencies is mounting as the Federal Reserve’s rate hikes boost money flows from emerging economies to the US. The rupee is down more than 5% this year, reaching a new low of 78.3862 on Wednesday.
A large dollar forward book acts as an additional buffer in the hands of the RBI on top of the cash reserves. Governor Shaktikanta Das has said the central bank is using a multi-pronged intervention approach to minimize the actual outflow of dollars.
The strategy largely works like this: When the RBI intervenes in the spot market to curb rupee losses, it sells dollars and buys rupees, depleting interbank liquidity. And then on the spot settlement date it does what is commonly known as a buy-sell swap in the futures market to offset the liquidity impact.
Most strategists remain bearish on the rupee amid $27 billion outflows from Indian equities this year. Bank of America expects the currency to fall to 81 to a dollar by the end of the year.
“In the current global scenario where the dollar remains strong and high commodity prices are negatively impacting India’s current account dynamics, we have a bearish view on the rupee,” said Parul Mittal Sinha, head of financial markets at the United Nations. India at Standard Chartered.