To protect forex reserves, RBI may offer only limited support to rupee

MUMBAI: A strong dollar has hit all emerging currencies, including the rupee in the past few days.However, currency traders and economists expect only limited dollar sales by the Reserve Bank of India (RBI) to stem the rupee's fall, as such an intervention may thwart the central bank's efforts to shore up forex reserves.
The central bank intervenes both ways -it buys the US currency to check sharp rupee appreciation and sells to rein in the local unit's deep depreciation. Its stated policy is to intervene only to curb excess volatility.

The RBI has been buying dollars in the past few months to shore up forex reserves after it had used them to arrest the rupee's sharp plunge two years ago.

Extensive dollar sales could now reverse the exercise. So, it may sell the dollar only in a limited manner to facilitate the rupee's stability. While announcing a rate cut last week, RBI Governor Raghuram Rajan said that an excessively strong rupee was undesirable.

“The RBI would intervene only as a speed-breaker to minimise the pace of volatility,“ said KN Dey, senior advisor at Mecklai Financial, a forex advisory firm.“We expect only limited dollar selling by the RBI so that it does not impact the forex reserves to a large extent.“

In the past five days, the rupee has fallen 0.83% against the dollar. The Chinese yuan has gained 0.14%, while the Thai bhat has lost 1.65%. The Indonesian rupiah has fallen 1.55%.

Better-than-expected US payroll jobs data last week led investors to believe that the US central bank might hike its policy rate mid-year.

The dollar surged to almost a 12year high against the euro last Friday as investors were looking at dollar-backed assets, which are also perceived to be the safest investment bets. In the past four trading sessions, the rupee has swung between 62.88 and 62.17 per dollar, marking high volatility.

The RBI was suspected to have intervened in the currency market to curb volatility, stemming the rupee's dip, dealers said. At the 62.72 level, some state-owned banks were seen selling dollars to an extent. But, intervention was mild unlike the big ones in the past, they said.

“The RBI is unlikely to intervene in the currency market heavily to the extent the rupee is not mis-aligned with its fundamentals,“ said Shubhada Rao, chief economist at Yes Bank.“The speculative element of ru pee-dollar movements will be subdued now.“

Since the beginning of the year, the central bank has increased its reserves to $338 billion from $319 billion. As a percentage to the country's total external debt, reserves now stand at about 73%, compared with 130% six-seven years ago.

The RBI sold fewer dollars in January to reduce currency volatility. It sold $3.12 billion dollars in the first month of this year, or just over a quarter of the previous month's sales.

“We do not expect any large-scale intervention on the short side as it can hurt the reserve accumulation process,“ said Anindya Banerjee, currency analyst at Kotak Securities. “The RBI would be selling dollars through forward sales, which will not impact forex reserves and rupee liquidity .“

It bought a net $12.14 billion in spot foreign exchange markets in January, the highest since January 2008, show latest data from the central bank.

But in the forwards market, where it intervenes to tackle volatility, the RBI's net dollar purchase has fallen by about 1.27 billion in January , suggesting a rise in sales.