RBI sold $2.46 bn in spot market in August

Rupee had weakened significantly in August due to dollar demand

The Reserve Bank of India’s (RBI) net dollar sales in the forex spot market was $2.46 billion in August — when the rupee touched an all-time low of 68.85 against the dollar during intra-day trades — compared with $5.98 billion in July.

According to RBI data released on Thursday, it sold $3.18 billion and bought $324 million in August.

Notably, RBI’s activity in the spot market was much higher in August, with the outstanding net forward sale rising to $9.05 billion, against $4.74 billion in July, RBI data showed.

The rupee had weakened significantly in August due to month-end dollar demand from importers. Besides, even foreign institutional investors (FIIs) were selling their holdings in the domestic market on fears of US Fed tapering. FIIs were net sellers to the tune of $2.4 billion in August. Although RBI had taken various liquidity tightening measures to help the rupee in July, the rupee went on weakening.

Given the extent of sharp rupee slide and volatility in the market, RBI had limited room to go on selling dollars in the spot market to arrest rupee slide in August, said two senior foreign exchange dealers.

India’s foreign exchange reserves had been depleting through the five months till August. They declined from $292.6 billion at end-March to $275.4 billion at end-August. Forex reserves were down by $4.76 billion in August itself, according to RBI data.

RBI seemed to have chosen to sell dollars in the forward market to signal the market had a choice to reverse the contracts, said a treasury head of a private bank.

Net dollar sales in the spot market in September would have declined further as the rupee started showing signs of recovery. “In September, the rupee recovered due to which intervention by RBI in the foreign exchange market by way of dollar sale by state-run banks would have declined,” said the treasury head of a public sector bank.

On Thursday, the rupee ended at 61.36 against the dollar, compared to the previous close of 61.94. The Indian currency’s appreciation was on the back of reports that the government was in talks for entry into benchmark indexes. The rupee had opened at 62.17 against the dollar and, during intra-day trades, touched a high of 61.33 and a low of 62.29.

Tracking the appreciation in the rupee, government bond yields fell. The yield on the 10-year benchmark government bond 7.16 per cent 2023 ended at 8.42 per cent, compared to the previous close of 8.46 per cent.