Improvement in India’s trade deficit, inflow of bonds and easing pressure on the rupee in the offshore market have reduced the need for the Reserve Bank of India (RBI) to intervene aggressively in the foreign exchange market.
RBI interventions were significantly reduced at the start of the year, with the RBI purchasing $8.5 billion in February and making no sales, its latest monthly bulletin showed.
Its gross intervention in the foreign exchange market in February was the lowest in six months and was about an eighth of the average monthly intervention between October and December.
“Pressures (on the rupee) reduced during the January-March period compared to the October-December period, which reduced the scale of intervention,” said Vivek Kumar, economist at QuantEco Research.
Mr. Kumar believes that factors such as India’s narrowing trade deficit have contributed to the decline in foreign exchange activity. The merchandise trade deficit narrowed to its lowest level in 11 months in March.
According to economists, India’s current account will turn into surplus in the March quarter.
The data on the RBI’s total foreign exchange activity reflects its bilateral interventions in the onshore spot market and the non-deliverable futures market, as well as the maturity of the futures contracts, said a person familiar with the reasoning of the central bank.
“When conditions are favorable and the RBI no longer needs to intervene in the offshore market, the gross amount will come down,” said the person, who requested anonymity because they are not authorized to speak to the media.
Although data on total turnover in the non-deliverable futures market is not available, the ratio of the RBI’s foreign exchange activity to turnover in the interbank spot and forward market term is a comparative indicator.
This ratio declined from 0.14 in October to 0.01 in February, indicating a reduction in the scale of RBI interventions.
The decline in RBI activity in the foreign exchange market followed the IMF’s December reclassification of India’s exchange rate regime from ‘floating’ to ‘stabilized’.
“The decline in the RBI’s overall intervention in the foreign exchange market may have been coincidental with the IMF’s reclassification,” said Dhiraj Nim, an economist at ANZ Bank.
Going forward, foreign exchange market interventions are likely to focus on buying dollars as the central bank seeks to absorb inflows and limit the rupee’s appreciation against other currencies like the yuan Chinese, Mr. Nim said.
