The average monthly turnover in the foreign exchange market rose significantly to about $109 billion in 1997-98 from about $78 billion during 1996-97, the Reserve Bank of India's (RBI) annual report for 1997-98 said.
The report attributed the rise in turnover largely to a spurt in inter-bank transactions during the second half of the year.
The average monthly turnover in the merchant segment rose to about $18 billion from $14 billion in 1996-97 reflecting the expansion in transactions relating to invisibles and capital flows, the report said.
The inter-bank to merchant turnover ratio averaged 5:1 both during 1996-96 and 1997-98, it added. But, in September 1997 _ a period of exchange rate instability _ the inter-bank to merchant turnover ratio rose to about 6:1, it said.
In the merchant segment, spot transactions dominated while forward transactions accounted for only about 25 to 30 per cent, the RBI annual report said. But it registered a rise in the second half of the year, to about 38 per cent in January, it added.
"Forward premia during 1997-98 continued to be determined largely by demand and supply conditions and market perceptions and did not mechanically follow interest parity conditions," the report said.
The rupee weakened sharply during the year, to 42.24 in June 1998, from 35.81 in April 1997 (Fedai indicative rates - monthly). As a result, the RBI had to intervene in the forward market to reduce demand-supply mismatches.
The central bank supplemented its direct intervention with monetary policy measures to curb speculative activities and to ensure orderly market conditions. "The year 1997-98 posed a severe challenge for the exchange rate management in the face of the threat of external contagion and domestic uncertainty," the report said. It said the market was driven by downside expectations created largely in the backwash of the currency turmoil in South-east Asia and political developments within the country which fuelled speculative activity.
Further, the intensification of the Asian currency turmoil and the international reaction to the Indian nuclear tests in May 1998 necessitated policy responses to stabilise the foreign exchange market.
To signal the RBI stance on the desired pace and degree of market correction, interventions in the market were supplemented by stringent monetary measures to lend support to the rupee when required.
