India’s central bank appears to have stepped up its interventions in the futures market to slow the rupee’s decline and preserve its hard-earned reserves.
The Reserve Bank of India reduced its portfolio of forward dollars by $12 billion to $15 billion, from around $64 billion at the end of April, according to estimates by DBS Bank Ltd. Standard Chartered Plc. said the authority intervened significantly through attackers.
The move shows that the central bank is doing all it can to limit losses in the currency, which set a series of record lows this month and threatens to further accelerate inflation. According to Standard Chartered, the RBI’s intervention strategy caused annualized one-year dollar-to-rupee forward premia to fall below 3% for the first time in a decade.
“When there is pressure on the rupiah, instead of drawing heavily on the reserves, they are now liquidating these forwards in circulation,” said Amit Pabari, managing director of CR Forex. Forwards were built to cushion the impact of events like now, he added.
Pressure is mounting on emerging market currencies as interest rate hikes by the Federal Reserve stimulate the flow of funds to the United States from developing economies. The rupee is down more than 5% this year and set a new all-time low at 78.3862 on Wednesday.
A large book of forward dollars acts as an additional buffer in the hands of the RBI in addition to spot reserves. Governor Shaktikanta Das said the central bank is using a multi-pronged intervention approach to minimize actual dollar outflows.
The strategy largely works like this: when the RBI intervenes in the spot market to limit rupee losses, it sells dollars and buys rupees, which depletes interbank liquidity. And, then, on the spot settlement date, what is commonly referred to as a buy-sell swap in the futures market to offset the impact on liquidity.
Most strategists continue to be bearish on the rupee amid $27 billion outflow from Indian stocks this year. Bank of America expects the currency to slide to 81 to the dollar by the end of the year.
“In the current global scenario where the Dollar remains strong and high commodity prices are negatively impacting India’s current account dynamics, we have a bearish view for the Rupee,” said Parul Mittal Sinha, Head of Indian Financial Markets at Standard Chartered.