The Reserve Bank of India (RBI) massively intervened in the local currency market on Friday, and most likely in offshore markets as well, as part of a coordinated global effort to arrest the continuously falling financial asset prices.
The one-month forward points in offshore markets collapsed from 50 paise to 32 paise in a matter of minutes. The fall in offshore forward points was accompanied by a rapid strengthening of the rupee in onshore markets. The partially convertible currency recovered from 74.50 a dollar to close at 73.76 a dollar.
An RBI spokesperson did not want to comment on the issue, but currency dealers were almost certain that the Indian central bank had shed all its inhibition to operate overseas, beyond its comfort zone, to protect the rupee. If offshore intervention happened, it would likely be for the first time ever. But some keen currency observers said the RBI might not be a complete stranger to these markets.
“The central bank may have been intervening in these markets in small measures in the past too, but Friday’s action was quite loud,” said a senior currency dealer, requesting anonymity.
“It looks like there was globally coordinated action. Everything went up together. Stocks rose, crude oil and metals rose, currencies strengthened, the rupee really did a smart comeback, and offshore forward points collapsed. There are tell-tale signs that the RBI may have intervened in offshore markets,” said the currency dealer.
Abhishek Goenka, managing director at IFA Global, said the RBI heavily sold dollars even when there was huge risk aversion. And so, “as the risk on sentiment came back, the rupee benefitted”.
According to Goenka, the fall in the crude oil prices has managed to protect the rupee, otherwise the currency could have reached 77 a dollar. The RBI, it seems, would want to protect the rupee’s lifetime closing lows of 74.48 a dollar it reached in October 2018.
The RBI doesn’t put out direct data on its domestic intervention, but the data on dollar purchase and sales comes with a two-month lag. However, currency dealers get to know any central bank intervention by seeing how the exchange rate swings on persistent dollar buying or selling by nationalised banks. These banks work as a go-between the RBI and the markets.
However, if the RBI has to intervene in offshore markets — located in Dubai, Singapore, Hong Kong, and New York — it has to do it through local banks there. Or, it can take help from other central banks, which can intervene directly. For example, the Malaysian Central Bank and South Korean central bank are known to have capabilities to directly intervene in these markets.
Asian central banks pumped liquidity into the financial system and discussed emergency action to fight the global economy’s biggest threat since the financial crisis, Bloomberg reported.