RBI Update : RBI’s FX intervention eases as conditions turn favourable for rupee

RBI Update

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RBI Update : RBI’s FX intervention eases as conditions turn favourable for rupeeThe RBI’s interventions eased significantly earlier this year, with the RBI buying $8.5 billion in February and not making any sales, its latest monthly bulletin showed.

The Reserve Bank of India (RBI) has reduced its intervention in the foreign exchange market (forex market) due to positive developments for the Indian rupee.

Here’s a breakdown of why the RBI is intervening less: RBI Update

  • Improved trade deficit: India’s trade deficit, the difference between imports and exports, has narrowed. This means there’s less pressure on the rupee to weaken.
  • Bond inflows: Investments from foreign countries into Indian bonds have increased. This brings in more foreign currency, strengthening the rupee.
  • Reduced offshore pressure: The rupee’s value in the offshore market, where trading happens outside India, has become more stable. RBI Update

Overall, these factors have lessened the need for the RBI to aggressively buy or sell rupees to influence its exchange rate.

It’s important to note that the RBI might still intervene in the forex market in the future, but it’s likely to be focused on managing the rupee’s exchange rate rather than aggressively supporting it. RBI Update

India’s improving trade deficit, inflows into bonds and reduced pressure on the rupee in the offshore market has lowered the need for the Reserve Bank of India (RBI) to intervene aggressively in the foreign exchange market.

The RBI’s interventions eased significantly earlier this year, with the RBI buying $8.5 billion in February and not making any sales, its latest monthly bulletin showed. RBI Update

Its gross FX intervention in February was the lowest in six months and about an eighth of the average monthly intervention during October-December. RBI Update

“Pressures (on the rupee) eased in the January-March period vis-a-vis October-December, which in turn reduced the magnitude of intervention,” Vivek Kumar, an economist at QuantEco Research said. RBI Update

Kumar reckoned that factors like the drop in India’s trade deficit would have contributed to the reduced FX activity. The merchandise trade deficit narrowed to an 11-month low in March.

India’s current account will wing to a surplus in the March quarter, economists said. RBI Update

The data on RBI’s total FX activity reflects its two-sided interventions in the onshore spot and non-deliverable forwards market as well as the maturity of forwards, a person familiar with the central bank’s thinking said.

“When the conditions are favorable and the RBI doesn’t need to intervene in the offshore market, the gross amount will come down,” this person said, requesting anonymity as they are not authorised to speak to the media. RBI Update

While data for the total turnover in the non-deliverable forwards market is not available, the ratio of RBI’s FX activity to the interbank spot and forwards market turnover is a comparative metric. RBI Update

This ratio declined from 0.14 in October to 0.01 in February, signaling a decline in the extent of RBI’s interventions.

The fall in RBI’s forex market activity followed the IMF’s December reclassification of India’s exchange rate regime to “stabilised arrangement” from “floating”. RBI Update

“The decline in RBI’s aggregate FX intervention may have been co-incidental with the IMF’s reclassification,” Dhiraj Nim, an economist at ANZ Bank said. RBI Update

Going forward, the FX interventions are likely to be concentrated towards buying dollars as the central bank would look to absorb inflows and limit the rupee’s appreciation against peers like the Chinese yuan, Nim said. RBI Update

The Reserve Bank of India (RBI), India’s central bank, has eased its interventions in the foreign exchange market (forex) due to improved conditions for the rupee. Here’s a breakdown of what this means:

Why RBI intervenes in forex:

  • The RBI tries to manage the value of the rupee.
  • If the rupee weakens too much (depreciates), it can make imports expensive and fuel inflation.
  • To prevent this, the RBI can buy rupees using dollars, effectively strengthening the rupee (appreciation).

Why intervention has eased:

  • India’s trade deficit (the value of imports exceeding exports) has narrowed.
  • More money is flowing into Indian bonds, which is positive for the rupee.
  • Pressure on the rupee in overseas markets has lessened.

What this means:

  • The RBI is confident that the rupee can hold its own value without needing aggressive intervention.
  • This is good news for the Indian economy as it suggests stability.

Some additional points:

  • The RBI may still intervene occasionally, but likely to buy dollars to manage the rupee’s appreciation against other currencies.
  • Economists predict India’s current account (a broader measure of trade) might even show a surplus soon, which would further strengthen the rupee.

Overall, this is a positive development for the Indian rupee and the Indian economy.

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