India’s central bank appears to have stepped up intervention in the futures market to slow the rupee’s fall and preserve its hard-earned reserves.
The Reserve Bank of India has reduced its forward-dollar book by about $64 billion to $12 billion to $15 billion at the end of April, according to estimates by DBS Bank Ltd. Standard Chartered Plc. Said that the authority has significantly intervened through the forward.
The move suggests the central bank is removing all halts to contain losses in the currency, which set a series of record levels this month and threatened to further accelerate inflation. According to Standard Chartered, the RBI’s intervention strategy has slashed the dollar-rupee one-year annual forward premium to below 3% for the first time in a decade.
“When it’s under pressure” RupeeAmit Pabri, Managing Director, CR Forex said, “Instead of dipping more in reserves, they are now liquidating those outstanding forwards.” Forwards were created to mitigate the impact of events like now, he said.
Emerging market currencies are under increasing pressure as Federal Reserve interest rate hikes push funds from developing economies into the US. The rupee has depreciated over 5% this year and set a new all-time low of 78.3862 on Wednesday. It rose 0.2% on Thursday.
A large forward dollar book acts as an additional buffer in the hands of RBI over and above the spot reserve. Governor Shaktikanta Das has said that the central bank uses a multi-pronged intervention approach to reduce the actual outflow of the dollar.
The strategy works largely like this: when reserve Bank of India The rupee intervenes in the spot market to prevent losses, it sells dollars and buys rupees, thereby reducing interbank liquidity. And, then in the forward market to offset the liquidity effect at the date of spot settlement, commonly known as buy-sell swaps.
The dollar-rupee one-year annualized futures premium on Wednesday closed at 2.86%, the lowest since November 2011. This could help boost demand for local credit amidst lower hedging costs and higher returns for foreign investors.
Most strategists continue to bear down on the rupee this year amid an outflow of $27 billion from the Indian stock market. Bank of America expects the currency to drop to $81 per dollar by the end of the year.
Parul Mittal Sinha, Head of India Financial Markets at Standard Chartered said, “In the current global scenario where the dollar remains strong and rising commodity prices negatively impact India’s current account dynamics, we may see a bearish outlook on the rupee. perspective.”