The Reserve Bank of India bought a record $11.86 billion of foreign currency in February, its fourth straight month of purchases, to stem gains in the rupee.
MUMBAI: The Reserve Bank of India bought a record $11.86 billion of foreign currency in February, its fourth straight month of purchases, to stem gains in the rupee.
Analysts are not surprised. They say the foreign exchange reserve numbers released last month gave enough indication of what is to come. From $179.05 billion in the last week of January, reserves rose to $193.12 billion as of February 23, a rise of more than $14 billion in a month.
It included the biggest jump in two years of $5.03 billion — from $180.04 billion to $185.08 billion — in the week ended February 9. It was the second largest weekly addition since 2000, below the $11.19 billion added in the week ended March 18, 2005.
Forex experts say the high figures directly point to the amount of inflows coming into India. “There are huge flows coming in from foreign direct investment (FDI) and external commercial borrowings (ECBs),” said Agam Gupta, head of forex and derivatives trading, South Asia, Standard Chartered Bank. Gupta expects inflows to be stronger this year because companies are likely to raise more money from abroad as liquidity is tight in the domestic market.
The RBI’s buying also kept the rupee in tight leash in February. The local currency traded in the narrow band between Rs 44.10 and Rs 44.28 per dollar.
The RBI may also have stepped up its dollar purchases in February because, traditionally, companies bring in ECB flows in the last quarter of the year, said Vikas Agrawal, fixed income and forex strategist, JP Morgan. “But, it will be wrong to say that huge inflows in the month are only due to ECBs. FDI and other flows are also there,” Agrawal said.
Analysts don’t expect the RBI figures to show a huge upside in March given that the rupee has strengthened sharply and the forex reserves have also not risen by much. In March the reserves rose by just above $5 billion to $199.17 billion, while the rupee has gained sharply to close at Rs 43/$ during that period, (it is below 43 now).
The RBI has been staying away from intervening in the market on fears that it will add to the rupee liquidity, which it has been trying to keep in check by consistent rate hikes. The battle with liquidity is a part of the RBI war over high inflation.
This surprising inaction by the RBI has meant that the Real Effective Exchange Rate (REER) of the rupee has touched a 14 year high. Analysts think the overvaluation in the rupee has taken a back seat for the RBI over inflation in the short term.
“I think the RBI is more concerned about wider implications of its possible action in the forex market. I don’t think they have lost sight of the REER but right now they are more concerned about the liquidity. REER would come into the picture only when they think it is the right time,” said P Mukherjee, treasurer, UTI Bank.
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