RBI steps up intervention in forwards, rupee weakens on heavy dollar demand

The central bank is parking these accumulated dollars in the forwards markets, which is improving liquidity for now at the cost of demand of dollar for a future date

Higher demand for the dollar in view of defence spending weakened the rupee on Tuesday, even as the Reserve Bank of India (RBI) continued to mop up the greenback, which kept coming in thanks to Reliance Jio’s stake sales. 

Currency dealers said nationalised banks had been quite active in buying dollars since the last few days, and a subsequent jump in the forward premium would indicate they were buying spot dollars on behalf of the central bank and selling them in the forward markets. 

Stock exchanges are also on the rise, which has helped the RBI accumulate dollars. The RBI has parked these accumulated dollars in the forward market, which has seen improved liquidity for now, at the cost of demand for dollar at a future date. 

The rupee closed at 74.94 to the dollar on Tuesday, down from 74.69. The 12-month forward premia have surged 10 paise in two session this week. Such jump happens when the central bank buys dollars in the spot market and sells them in the forward market. 

The 12-month forward premium is roughly 3.96 per cent. Admittedly, the premium is still lower than the normal 4.0-4.5 per cent that prevails in the market. Sometimes, the premium may jump to 6 per cent if there is a shortage in dollars anticipated for the future.

“Importers have picked up hedging, and the RBI has helped them keep the premium low. However, the hedging demand is pushing up the premium,” said a senior currency dealer with a foreign bank. “Besides, the RBI has generally become very active in the forward space in the last few days,” said the dealer.

The low premium is because of the RBI’s liquidity stance, which could be intentional. The RBI has done buy/sell swaps with banks a couple of times in the last three years. It has bought spot dollars and given banks rupee liquidity.

From next year, the RBI would have to return the dollars to banks, which technically means buying from the markets. Theoretically, a soft rate helps the RBI buy dollars at a cheap rate. However, the RBI needn’t go to such lengths, considering the huge foreign exchange reserves it has of above $500 billion, which it keeps accumulating every month. 

According to IFA Global, a currency consultant, the central bank did not allow the rupee to appreciate in June. This is because it wanted to close its annual accounts with a high exchange rate, so that its local assets were valued high and the RBI could pay more dividend.  

“It would be interesting to see how much the RBI allows the rupee to adjust, as the RBI’s balance sheet date is behind us. It has, so far, not allowed positioning to build up in any direction and has kept speculators at bay,” said the IFA Global, adding that there could now be a new normal level for the rupee.