Latest data from RBI shows that the central bank has an outstanding forward position of $10.38 billion
Dealing with an unprecedented liquidity surplus for a longer period of time is tricky, especially when it impinges on foreign exchange interventions. But the Reserve Bank of India (RBI) is putting its best efforts in at least avoiding an increase in an already colossal level of rupee liquidity and at the same time keeping the dollar/rupee exchange rate under a leash.
Latest data from RBI shows that the central bank has an outstanding forward position of $10.38 billion. What it means is that the central bank bought that much dollars with the option to take delivery at a future date. Since for every dollar RBI purchases, it gives back rupees to the system, forward contracts help it to postpone this infusion. That the amount is the highest since November 2014 indicates the central bank’s strong preference to use forward contracts in stemming the rupee’s rise and at the same time deferring the consequence on liquidity.
If we go into more details, a look at the tenure of forward contracts throws some more light. In October 2016, before the demonetisation of high-value notes was announced, outstanding forward contracts totalled $5.6 billion, half of what they were in March this year. Of these, the share of those with tenure of 3-12 months was 58% and that of 1-3 months was 6%. In March this year, besides the doubling of the outstanding forward position, the share of 3-12 months tenure has increased to 75%.
This is a time-tested method and the central bank has used the forward market intensively to manage liquidity, outflows and the exchange rate at several times in the past.
Of course, RBI has increased its dollar purchases from the spot market as well. Since dollar inflows into equity and bonds have increased, the central bank perhaps feels a strong intervention is warranted. Since January, foreign investors have poured more than $14 billion into domestic stocks and bonds, making the rupee gain 4.5%.
Further, RBI is milking the opportunity to beef up the country’s forex reserves. Reserves are at an all-time high of $372 billion as of 28 April, another set of data from the central bank showed. After all, with uncertainty from Europe a given in the coming days as the political landscape there changes and a possible return of dollars to the US once the Federal Reserve begins to increase rates faster, it is better to be prepared.
If dollar inflows continue unabated, it is a given that RBI would be an active participan
source: wealthforum.com