RBI unloads dollars to prop up rupee, curb inflation

The Reserve Bank of India (RBI) is aggressively selling dollars through major public sector banks to support the rupee and contain inflation. The spot rupee on Thursday wound up at 46.20/21 per dollar, after touching an intra-day high of 46.18. Last week, it had ended at 46.50.

Since there have been no fresh foreign fund inflows into the market, dealers attributed this week's rise in the rupee to dollar selling by the central bank.

They see this as an attempt to contain inflation too. "If the rupee appreciates, forex outflow towards oil payments and other import bills will come down. This will have a positive impact on inflation," a dealer said.

Besides, this also soaks up liquidity as for every dollar RBI sells, it absorbs rupee liquidity by an equivalent proportion.

The RBI has already spent around $1.5-1.7 billion to support the rupee due to which the forex reserves have fallen to $118 billion.

The liquidity in the banking system is either getting absorbed by corporates buying dollars for hedging their open positions or by banks buying greenbacks for intervening in the foreign exchange market on the RBI's behalf.

Oil companies are preferring to pay their dues on a daily spot basis rather than waiting for the month end to avoid the currency risk. Interestingly, there was one reverse repo bid by a major state-owned bank today for Rs 5,000 crore after a long time.

Repo bids by banks are indicative of the excess liquidity in the system. Today, bids have come down to Rs 1,000-2,000 crore per day from Rs 8,000-10,000 crore a week back.

And the outstanding liquidity in the banking system stands reduced to Rs 40,000 crore from Rs 58,000-60,000 crore a week back.

Forward premiums have too been rising on the back of corporate demand. The six-month and one-year dollar premiums have shot up to 2.85 per cent and 2.3 per cent, respectively, on an annualised basis as against last week's close of 2.5 per cent and 2.05 per cent, respectively.