The liquidity management activity of the Reserve Bank of India (RBI) is not related to exchange rate movements, its deputy governor Subir Gokarn said on Wednesday. The clarification came following speculation in the market that the central bank might not frequently conduct open market operations (OMOs), as the rupee has shown signs of strengthening against the dollar in the last few sessions.
Apart from the government’s high borrowing programme, RBI’s dollar sales to arrest the rupee fall have drained liquidity from the system. The central bank has been buying bonds from the market via OMOs to avoid acute liquidity shortage. Absence of OMOs last week amid a strengthening of the rupee led to speculation that the frequency of OMOs might come down.
On Wednesday, Gokarn said he did not think the rupee movements were directly correlated with OMOs. “Liquidity management operations are unrelated to exchange rate movements. OMOs are being driven by judgments on liquidity conditions — whatever is causing the liquidity stress, whether it is foreign exchange market or something else,” he told reporters at the sidelines of a seminar here.
Market participants expect OMOs to occur less frequently as the system liquidity has improved in recent weeks and is well within the central bank’s comfort zone of +/- 1 per cent of banks’ net demand and time liabilities.
There is a significat comedown in the banks’ borrowing from RBI’s repo window, which was more than Rs 1 lakh-crore daily. On Wednesday, banks borrowed around Rs 47,000 crore from RBI.
The central bank, after having a hands-off approach for nine months, started intervening in the foreign exchange market since September, and sold little over $20 billion of dollars during the September-May period in the spot market to stem the rupee fall.
RBI’s bond purchases via OMOs kept the yields under check. Else, it would have increased the cost of the government’s borrowing programme, pegged at Rs 5.7 lakh-crore (gross) for the current financial year against Rs 5.1 lakh-crore raised in the previous year.
A high current account deficit (CAD), Gokarn said, had also weighed on the rupee. Any improvement on the deficit “will help” the rupee recover and stabilise. “The CAD has clearly been a contributing factor when demand for the dollar is high to finance the deficit, and capital inflow are not matching, putting pressure on the rupee,” he added.
As the CAD corrects, which could be due to lower oil prices or growth in exports or imports coming down, it will have a reverse effect. This, in turn, would help to stabilise the rupee, but the CAD in the last few months had been a contributing factor, Gokarn said.
An expansion of ceilings on foreign institutional investment (FII) investment is helping, he said. “There are some positive developments on the domestic front in terms of expectation of policy action. Expansion on the FII ceiling (means) at some point that money is also likely to come in,” he added.
Separately, Reserve Bank of India Governor D Subbarao said on Wednesday the central bank was “deeply sensitive” to the problem of inflation, and was committed to bringing it down to comfortable levels.
“It has been our effort over the last two years; it will continue to be our effort,” he said at an event organised by the Indian Overseas Bank. He was responding to a question on what the RBI was doing to control inflation.
Wholesale Price Index-based inflation rate rose to 7.6% in May from 7.2% in April, mainly due to rise in the prices of food and fuel. Consumer Price Index-based inflation accelerated to 10.4% in April from 9.4% in March.
RBI hopes to pin down inflation closer to 4.0-4.5% over the medium term. The central bank will detail its next policy review on July 31.
