RBI will have limited scope to intervene in FX market

Economists though say RBI is in a comfotable situation with forex reserves

Despite the Reserve Bank of India's (RBI) heavy dollar selling through state-run banks in recent times to arrest rupee depreciation, economists believe the central bank is in a fairly comfortable situation. However, it is also agreed that the central bank will have limited option to continue to intervene on a sustained basis in large doses.

RBI data shows that even after dollar sales to the extent of $2.25 billion in June, the rupee weakened by almost 5% during the month. The sale made by RBI in June was the highest in almost one-and-a-half years.

RBI data showed that for the week ending June 28, RBI's total forex reserves stood at $285 million and during the week, it fell by $3 billion.

“RBI needs to build reserves. RBI will have limited option to continue to intervene on a sustained basis in such large doses,” said Subhada Rao, chief economist, YES Bank.

However, Rao added that if the Current Account Deficit (CAD) is taken into account and the short-term debt re-payments are considered, there is adequate forex reserves.

“We have import cover for six to six-and-a-half months. However, RBI using forex reserves to intervene on a sustained basis is not an option particularly when risks are there on the global side,” Rao said.

Economists also agree that RBI may not be comfortable using forex reserves.

“The idea for accumulating reserves is for using it in times like these. From that perspective we are still fairly comfortable. Although in June RBI sold $2.25 billion, they took subsequent measures in July which shows that maybe they are not comfortable using the reserves,” said A Prasanna, chief economist, ICICI Securities PD.

The rupee ended at Rs 61.44 on Wednesday, an all-time closing low against the dollar. Today, it has touched all time low of (intraday) of 62/dollar amid weak equity markets.