RBI’s Forex Intervention Hit At Least $8 Bn To Support Rupee Last Week

The Reserve Bank of India (RBI) sold at least $8 billion in the foreign exchange market last week to support the rupee, according to estimates from six bankers cited by Reuters, as increased dollar inflows gave the central bank greater room to intervene.

The bankers put the RBI's estimated market intervention between $8 billion and $15 billion during the week, the report said.

The sustained dollar sales helped the rupee strengthen to ₹94.2850 against the US dollar on September 3, its strongest level in more than two months, it added.

One banker familiar with the RBI's operations estimated dollar sales at around $15 billion, while another banker at a state-run lender put the figure at about $10 billion-$11 billion for the week ended September 4, per Reuters.

The latter estimate was reportedly more than three times the intervention recorded in the previous week.

Policy-Driven Dollar Inflows

The RBI's recent interventions have been aided by more than $136 billion of inflows attracted through policy measures linked to foreign exchange borrowing and deposits.

The central bank's discounted hedging facility for overseas borrowings by state-run companies and banks, along with a free-of-cost hedging facility for banks raising overseas foreign currency deposits, has contributed to these inflows, the Reuters report said.

The additional dollar liquidity has effectively increased the RBI's capacity to sell foreign currency while managing pressure on the rupee.

FX Reserves Strengthen Capacity

India's foreign exchange reserves stood at a record $740.8 billion as of August 21.

According to the Reuters report, JP Morgan estimated that reserves have since crossed $750 billion.

"Increased near-term ammunition, in turn, explains the more aggressive intervention by the RBI in recent days, to try and push the rupee stronger, and bring exporters into the market," JP Morgan said in a Friday note, per Reuters.

However, analysts do not expect the rupee's recovery from its May low of ₹96.96 to develop into a sustained appreciation cycle.

Goldman Sachs expects the currency to remain within a relatively narrow range over the medium term with stronger external balances unlikely to generate a prolonged upside, the report said.

The RBI's dollar sales also withdraw rupee liquidity from the banking system. This comes as surplus liquidity has risen sharply, potentially pushing interbank borrowing costs below the policy rate and weakening the transmission of monetary policy.

Bankers noted that concerns over the rupee's earlier weakness have kept hedging demand tilted towards dollars, with importers increasing forward purchases while exporters delay dollar sales in anticipation of better exchange rates, per Reuters.

The RBI could use future dollar inflows to reduce its forward foreign exchange liabilities, which may have exceeded $200 billion, the report added.