The Reserve Bank of India sold a record $10.3 billion in the forward market in May to curb volatility in the rupee, which has been in a nosedive against the dollar.
The central bank’s activity in the spot market was much less. It sold about $1.26 billion while purchasing $778 million, resulting in net sale of $485 million, according to RBI data.
Treasury executives and dealers said the rupee turned weak against the dollar amid tight liquidity in the domestic front. In this backdrop, RBI preferred to intervene via the derivative market, as any operations to pump in dollars could have led to sucking out of rupee resources from the system, which was already under strain.
The rupee fell sharply (6.4 per cent) to 52.74 against a dollar at the end of May from Rs 56.11 at the end of April, according to Bloomberg data.
The central bank’s activity in April was on a low scale. It sold just $275 million in the spot market. It had sold dollars worth $3.45 billion in the forward market in April, RBI said.
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Meanwhile, taking benefit of the high interest rates and the sharp fall in the rupee, non-resident Indians (NRIs) brought a record $2.75 billion into bank deposits in May, as against a mere $257 million in May 2011.
NRIs brought in $11 billion into deposits during 2011-12, as against $3.23 billion in 2010-11. NRI deposits stood at $58.8 billion in April 2012, up from $52.3 billion a year ago.
Two most prominent deposits where NRIs park money are non-resident external (NRE) rupee accounts and foreign currency non-resident (banks) (FCNR-B). In the case of NRE accounts, the amount is kept in rupee. While money is repatriable, NRIs bear the exchange risk while taking out money abroad.
As for FCNR-B deposits, the amount is kept in foreign currency. It is also repatriable money. Bank bears the exchange rate risk when money is moved abroad from this account.
In May 2012, NRE deposits saw inflow of $3.37 billion as against inflow of $144 million in May 2011. A large amount of funds moved into NRE deposit after banks jacked up rates in the second half of FY12, said a senior executive with Chennai-based public sector bank.
RBI had hiked the ceiling on these deposits as one of the steps to attract foreign currency when the rupee was rapidly losing value against international currencies.
The interest rates prevailing in India are higher than those being offered in developed countries and the Persian Gulf. NRIs have taken the benefit of the interest rate arbitrage.
Besides interest rate differential, the gain from the weak rupee, even after factoring in foreign exchange risk, also influenced the flows, said a senior executive with a public sector bank.
The trend for FCNR-B deposits was different. In May 2012, NRIs withdrew $565 million from deposit base.
Cumulative flows into NRI deposits during April-May 2012 stood at $ 4.75 billion as against $ 664 million in the same period last year.
