RBI ramped rupee defense to record before government bazooka
The Reserve Bank of India has reached a record $110-$115 billion in its net-short dollar book, a key tool for defending the rupee. This significant increase in forward dollar sales, particularly in offshore markets, aims to curb excessive volatili...
By Bloomberg | Updated:
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To get a sense of the pressure India’s financial markets were straining under before a wave of support measures announced last week, look no further than the record amounts of dollars the central bank had committed to support the beleaguered rupee.
The RBI’s net-short dollar book, a measure of the degree it had sold forward its stockpile of the US currency, climbed to about $110 billion-$115 billion across onshore and offshore markets, according to people familiar with the developments. That’s about 16% of its total dollar holdings and represents a sharp rise from $95.3 billion in April.
The central bank ramped up its interventions after the rupee weakened to a record low on May 20, when it almost hit the 97 per dollar mark, the people said, asking not to be named because they aren’t authorized to speak to the media.
Relief finally came after authorities on Friday said they would scrap taxes on overseas investment in government securities and make more bonds available to overseas investors, among other measures. The rupee rose 0.9% versus the dollar after the steps, its biggest gain since April 2, as the measures spurred the largest inflow in almost a year to India’s index-eligible bonds.
Bond yields eased on Monday, particularly at the shorter-end, although the currency weakened as fresh tensions in the Middle East drove up oil prices.
The measures targeting bond inflows have the potential to directly impact the exchange rate over time, Joey Chew, head of Asia foreign-exchange research at HSBC Holdings Plc, wrote in a note. The coordinated steps announced by the RBI and the government prompted analysts from Goldman Sachs Group Inc. to say that the rupee’s slide may be nearing a floor.
The currency has borne the brunt of the oil-price shock caused by the Iran war, as India depends heavily on imports to meet its energy needs. The rupee has repeatedly fallen to record lows this year as refiners sold rupees for dollars to pay for costlier crude.
In recent weeks, the central bank has sold offshore dollars largely via short-dated contracts, typically maturing in one-to-three months, the people said. At the same time, it has conducted onshore swaps of maturities of more than a year, they said. These swaps replenish some of the liquidity drain caused by the RBI’s onshore dollar sales aimed at stabilizing the rupee.
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The RBI’s use of NDFs, which have grown over the past couple of years, allows the central bank to influence the exchange rate without immediately depleting foreign-exchange reserves. Such interventions can signal policy intent and help steady the currency during periods of volatility.
A spokesperson for the RBI didn’t respond to an email seeking comment.
RBI Governor Sanjay Malhotra said on Friday that while the authority does not resist market-driven adjustments in the rupee, it curbs excessive volatility in the exchange rate. The currency is often influenced by speculative pressures that are not in sync with fundamentals, he added.
The growing derivatives book may still pose challenges. As contracts mature, they generate recurring demand for dollars, capping any sustained recovery in the rupee. The central bank is likely to use any renewed capital flows to unwind its short forward book and rebuild foreign-exchange reserves, according to Goldman Sachs Group Inc. analysts led by Kamakshya Trivedi.
India’s foreign-exchange reserves were at $682.3 billion in the week of May 29, having dropped more than $40 billion since the Iran war began in late February.
