RBI sold $922 million in foreign exchange market in October: Bulletin

Forward purchase book shrinks $10 bln as RBI spreads out interventions

The Reserve Bank of India (RBI) net sold $922 million in the foreign exchange market in October, the latest data in the central bank’s December bulletin showed.

While the net sale of dollars in October was far lower than $10.36 billion in September, the data showed a huge reduction in the RBI’s net long forward book, suggesting that the central bank had heavily intervened through the forwards segment of the currency market.

The data showed that the RBI’s outstanding net forward purchase book was at $241 million in October, $10.18 billion lower than $10.42 billion in September. The net forward purchase book has reduced drastically from $65.79 billion at the end of the previous fiscal year.

Over the past few months, the RBI has expanded the scope of its interventions in the foreign exchange market significantly to include activities in both the forwards and the futures segments. These are in addition to its interventions through dollar sales in the spot market.

The RBI sells dollars from its foreign exchange reserves in order to prevent excessive volatility in the rupee. So far this year, the rupee has depreciated 10.17 per cent against the US dollar. In October, the domestic currency weakened 1.7 per cent.

When the RBI sells dollars in the spot market, it drains out rupees from the banking system, leading to tighter liquidity conditions.

Analysts said that the heavy reduction in the forwards book was likely due to the RBI taking advance delivery of maturing positions and then not rolling those over.

The central bank was perhaps looking to prevent a sharp fall in the headline foreign exchange reserves, which dropped around $100 billion from late February to end September, analysts said. The RBI had said in September that a large part of the fall in reserves in the current fiscal year was due to the revaluation of reserves in the face of a stronger US dollar.

In April and May, the RBI had net bought $1.9 billion and $2 billion, respectively in the foreign exchange market. However, the central bank sold dollars every month from June to October.

In June, the net sales were at $3.7 billion followed by $19.05 billion in July.  In August, the RBI net-sold $4.3 billion, followed by $10.36 billion in September.