Change likely in RBI's forex stance

RBI could step up intervention if Fed signals sharp tapering

The Reserve Bank of India (RBI) has been cautious in using its foreign exchange reserves to stem the rupee’s depreciation through the last two years. Now, however, market participants expect the central bank to adopt a more aggressive stance to defend the currency.

According to latest data, RBI sold about $6 billion in the spot market in July. This, along with various liquidity tightening measures, helped the rupee end the month with a fall of only 1.65 per cent against the dollar.

Though the intervention in July was the most severe since January 2012 (when it sold $7.3 billion), market players said the quantum wasn’t huge. In August and September, the intervention might have been much more, they added.

The worst performing Asian currency till a fortnight ago, the rupee has now turned the tide; RBI is likely to continue with high intervention. The central bank, however, maintains it doesn’t target any particular level for the rupee and only intervenes to curb excess volatility.

Now, the central bank is seen intervening on specific days, particularly when steps are announced to support the rupee. “This strategy to intervene on days major steps are announced has been adopted so that the impact of those measures isn’t nullified,” said a senior official of a foreign bank.

Dealers said on the day a separate window for oil marketing companies was opened, RBI was seen intervening heavily. “Dollar selling in a more aggressive manner started when the rupee continuously started hitting new lows in August. And, the trend is continuing in September,” said a foreign exchange dealer at a large public sector bank.

Market watchers say the next few days would be crucial for the currency, considering the US Federal Open Market Committee meeting is scheduled for Wednesday. It is expected the meeting would provide clarity on when the US Federal Reserve would start tapering its stimulus programme, crucial for the fate of currencies of emerging markets, including India.

In case the US Fed indicates it would quickly start withdrawing its asset purchase programme, it would put pressure on all emerging market currencies and RBI might become more aggressive in selling dollars to avoid a sharp depreciation of the rupee.