RBI’s currency market intervention hits 18-month high in April

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MUMBAI: The Reserve Bank of India sold nearly $6 billion debt in April, the highest since November 2016 when it repaid the special deposit investors, as the central bank attempted to lessen the slide of the currency in the wake of an emerging market sell off due to hardening of the US interest rates.

The central bank sold a net debt of $2.5 billion in the spot market, and another $3.5 billion in the forward market as it ensured that speculators did not influence in the derivative market, latest data released by the RBI showed.

“RBI intervened in forex markets in April using multiple instruments, to manage Rupee volatility,” said Saugata Bhattacharya, chief economist at Axis Bank. “Tight domestic liquidity would have constrained spot foreign currency sales. This seems to have been supplemented by active intervention in forwards besides the roll overs and in the futures market.Intervention is likely to have continued in May, given that portfolio outflows were higher than in April”.

The rupee has fallen 6 per cent since January amid a pull out of funds from the emerging markets from international investors. Foreign funds have sold a net Rs 30,820 crore worth equities and bonds this year, compared to a net purchase of Rs 1.2 lakh crore a year earlier in the same period. Thanks to the US Fed normalising the monetary policy, global investors are taking funds back to the US. Because of this, the US Treasury yields pierced the 3 percent mark. This week the Fed is expected to raise rates again.

Other than India, all other emerging markets were also whipsawed by the US dollar movement. Apart from India, other countries such as Indonesia, and Turkey have raised rates to arrest the flight of capital. In fact, Argentina has sought a $50 billion emergency funding from the International Monetary Fund.

Besides, the rise in crude oil prices too added to the pressure on the local currency. Oil constitutes more than 20% of India’s import bill. The rupee lost 2% or almost Rs 1.35 in the month of April alone.

The last time the central bank intervened in such a huge scale was in November 2016, when it had to repay the special deposits it raised in 2013.

India has maintained that it would not intervene with rate hikes to steady the currency, but would only target inflation.

“The monetary policy is determined by our inflation targeting mandate and not by anything else,” Governor Urjit Patel told reporters last week. “To that effect, if there are international financial or crude oil or commodity price developments, then that is internalized in the inflation forecast projection and the consequent policy choice.”

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