RBI’s Intervention Draws More Hot Money Into Indian Markets

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RBI’s Intervention Draws More Hot Money Into Indian Markets

Hot money streaming into the markets of the country; get more hot updates…

Friday, 12th February 2021

The Reserve Bank of India, in order to maintain stability with the Indian rupee, took up a novel strategy of shifting part of its currency intervention to the forwards market. This has turned out to be a two-edged sword for them.

This endeavor on the part of the country’s Central Bank to sustain an equilibrium so as to keep the rupee stable in the midst of heavy foreign inflows as well as keeping excess liquidity under control has backfired. The market on the contrary is getting inundated with more foreign funds leading to a chain reaction of interventions.

The full length of the RBI’s operations came to light when, as of November, their exceptional forward's book took off from a negative $4.9 billion in the fiscal year 2019-20 to $28.3 billion.

This has thrust the 12-month implied yields which in turn show the interest rate differential between India and the US, at its peak in the past four years, which has brought about further inflows.

An increase in forwarding premium has also been the underlying cause for importers getting deterred from hedging their currency exposure and at the same time affecting stable inflows into the bond market.

This is how the RBI’s currency intervention works- they purchase dollars in the spot market so as to preclude pointed gains in the rupee. After that, they sell these dollars in the forwards market to counterbalance the impact of liquidity. However, these dollars are required to be delivered back to the RBI by banks at a later date. This pushes up forward premiums.

USD / INR trades close to the 11-month lows of 72.66 reached Thursday. However, despite that, the bulls are attempting a recovery, as the US dollar rebounds amid a tepid market mood. The cross was last seen trading at 72.77, up 0.10% on the day.

Anindya Banerjee, currency strategist at Kotak Securities said, “Speculators are gravitating to short the U.S. dollar and buy rupee due to the high forward premium, in order to prevent speculators from taking the rupee higher, the RBI is being forced to buy more dollars in the forwards market, which is pushing premia higher. This is a vicious cycle.”

The News Talkie Bureau



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