RBI reduces FX intervention

Lesser rupee volatility, thinner foreign flows since July, plus a rise in reserves, say observers

The Reserve Bank of India (RBI)’s interventions against the foreign portfolio flows attracted by India has reduced in recent months.

This is due to factors such as lesser volatility in the rupee against the dollar, thinner incremental foreign flows and more comfort with the foreign exchange reserves’ position.

Data from Nomura show the ratio of RBI intervention against actual foreign portfolio flows had peaked in July and been reducing since. “The ratio was at four, which was the peak, and has fallen to 0.9 in October. It might come down a little more,” said Craig Chan, managing director (head of foreign exchange strategy), Asia ex-Japan at Nomura.

RBI data show net purchase of foreign currency was $5.45 billion in July. It was $1.44 bn in September.

The Nomura data on net foreign portfolio inflows and the impact of the US Federal Reserve's quantitative easing shows from January 2009 to October 2014, foreign portfolio investment into India was $145.4 bn. While the estimated inflow attributable to quantitative easing was $32 bn. During this period, the Reserve Bank of India’s foreign currency reserves rose $43.4 bn.

“As long as there is no volatility in the rupee, it does not make sense for the Reserve Bank of India to intervene. In July, we had seen huge inflows into the market, which RBI had mopped in bigger lots. The incremental inflows have slowed. Now, the market is not worried much about the US Fed hikes,” said the chief currency dealer with a state-run bank.

The rupee ended at 61.84 to a dollar on Monday, compared with the previous close of 61.79.

The depreciation was because of gains in the dollar globally, after robust monthly US employment data sparked concerns that any earlier than expected rise in US interest rates could hamper foreign flows to emerging markets like India.

Foreign flows into India had gained momentum after a Bharatiya Janata Party-led alliance won the national election in May.

“We anticipate more momentum in Prime Minister Narendra Modi’s reform process in 2015. Notably, further fiscal consolidation, divestments and an increase in foreign institutional investor limits should sustain capital inflows. Lower oil prices should mean a persistent improvement in the current account and inflation. RBI is committed to lowering inflation expectations and now has the ability to curb excessive rupee weakness,” said Hong Kong and Shanghai Banking Corporation in a note to clients on Monday.

The note said these factors could mean the rupee being one of the more resilient currencies in Asia, although RBI is wary of spot appreciation, with its own Real Effective Exchange Rate measure showing signs of over-valuation.

Its foreign exchange reserves rose by $1.43 bn for the week ending November 28 to $316.31 bn. Foreign exchange reserves had hit a 39-month low on September 6 when it touched $ 274 bn. The reserves started rising after the central bank took several steps to encourage inflow.