After being a net seller in the spot foreign exchange market in August, the Reserve Bank of India (RBI) turned net buyer in September once again. The trend continued in October with the central bank mopping up flows thanks to enhancement in foreign portfolio investors’ (FPIs) investment limit in Indian debt.
According to a senior treasury official of a public sector bank, RBI had sold foreign exchange in early September to stem excess volatility, an effect of rout in global market triggered by events in China. A small portion was also used for rollover of hedge for foreign currency non-resident account (banks), or FCNR(B), deposits.
RBI was active in both spot and forward market in buying dollars. “In October, RBI has already mopped up almost all money ($1.5 billion) that FPIs brought to invest in government securities following enhancement in limit on FPIs’ exposure to government securities. Going forward, RBI will be active in both segments to increase resources in foreign exchange kitty,” he said.
Meanwhile, RBI data released on Friday showed foreign exchange reserves rose $2.26 billion for the week ended October 9 to $353.07 billion. Foreign currency assets, a key component of foreign exchange reserves, rose $2.22 billion to $329.52 billion.
“Since foreign flows had started coming in, RBI turned net buyers of dollars. Otherwise, the rupee could have appreciated much more. RBI had intervened at various levels to arrest steep appreciation of the rupee. I do not think the rupee will be allowed to appreciate beyond 64 per dollar,” said Ashutosh Khajuria, executive director, Federal Bank.
In the fourth bi-monthly monetary policy review held last month, RBI enhanced the investment limits for FPIs. By January 1, FPIs’ investment limit for government securities would be increased to Rs 1,79,500 crore from Rs 1,53,500 crore. The limits were to be enhanced in two tranches every year. As of last Monday, the enhancement was done by Rs 1,66,500 crore for government securities. For state development loans (SDL), the limit will be enhanced to Rs 7,000 crore by January 1 from nil earlier. As of last Monday, the enhancement in SDL limit was for Rs 3,500 crore.
An HSBC report released on Friday says offshore investors bought $1.7 billion worth of rupee bonds (government securities worth $1.17 billion and SDL of $550 million) during the week ending October 14. Foreign investors received a $2.5-billion debt investment quota on October 12, of which 70 per cent was utilised in three days. The remaining investment debt quota is available only for government securities investments ($700 million) and is likely to be fully utilised in the next 1-2 weeks, given the strong demand.
RBI had turned net sellers of foreign currency in August 2015, the first time in the past year, to arrest volatility in the rupee which began after China devalued the yuan.
Data released last Monday showed RBI had turned net sellers of foreign currency to the tune of $1,559 million compared to net buying worth $169 million in the previous month. The last time RBI had turned net sellers was in August 2014 for $511 million.