RBI ramps up forward dollar sales to defend stumbling rupee, say traders

India's central bank is accelerating its dollar sales in the forwards market as it seeks to support the ailing rupee, which hit a record low on Thursday, while limiting the impact of its interventions on cash in the banking system and on foreign exchange reserves. 

In the last two trading sessions, the Reserve Bank of India (RBI) conducted buy-sell swaps of an estimated size of $3 billion-4 billion in the forwards market, four traders told Reuters. 

The swaps are concentrated in the mid-to-far tenors, the traders said, requesting anonymity as they aren't authorised to talk to the media. 

FORWARDS IN LIEU OF NDF  The RBI has stepped up its presence in the forwards market after a long time. Its relatively large position in the non-deliverable forwards (NDF) market, estimated to be about $65 billion-$70 billion in November, is making it trickier to deploy that tool, traders said.

 

Previously, the RBI would intervene in the NDF market just before onshore markets opened to ensure a "soft" opening, which is now not an option anymore, a bank treasury official said. 

"With that shut out, they have had to go back to forwards." By pushing USD/INR NDF rates lower before the local over-the-counter market opens, the RBI sends a signal to the market for the day's session. 

The RBI's presence in the outright forwards market "represents a more traditional intervention approach," a trader at a private bank said. 

When the RBI sells dollars in the spot market, it sucks out rupee liquidity and brings down forex reserves. To avoid this, the central bank conducts buy/sell dollar/rupee swaps, which essentially means that it is selling dollars at a future date and not on the spot. 

The RBI intervening via forwards will help delay the drain on rupee liquidity, which remains tight, said Sameer Karyatt, executive director and head of trading for global financial markets at DBS Bank India. 

The rupee on Thursday dropped at an all-time low of 85.0750 to the U.S. dollar, after the Fed signalled fewer rate cuts next year than previously forecast. 

Dollar strength alongside India's slowing growth and widened trade deficit have kept the rupee under pressure, prompting the RBI to intervene in the spot market nearly everyday in December to help the rupee.  (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)