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RBI intervention in FxMkt-VRK100-21Apr14.pdf

RBI intervention in FxMkt-VRK100-21Apr14.pdf

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RBI's net intervention in Forex Markets was analyzed by RamaKrishna Vadlamudi for the year FY 2013-14.
RBI's net intervention in Forex Markets was analyzed by RamaKrishna Vadlamudi for the year FY 2013-14.

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Published by: RamaKrishna Vadlamudi on Apr 20, 2014
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RBI Net Intervention in Forex Markets
RamaKrishna Vadlamudi 21 April 2014 
Reserve Bank of India intervenes in the foreign exchange markets with the explicit view of controlling what it calls ‘excess volatility’ of the Indian rupee’s exchange rate. As can be seen from the above table, RBI intervened heavily in the market between June 2013 and January 2014. During the financial year 2013-14 (data is available only up to February 2014), it bought $18 billion and sold $16.80  billion, with net purchases amounting to about $1.2 billion.
RBI’s Intervention: The action in FY 2013-14 is divided into three periods:
Period Sale/Purchase (net) Remarks (in hindsight) USD-INR Jan.2014-Feb.2014 Sold $2.4 billion
Since Jan.14, INR continued to gain vs USD though in a limited  way. 17.04.14: 60.29 31.03.14: 59.95 31.12.13: 61.80
Oct.2013-Dec.2013 Bought $17.50 billion
INR started gaining from an historic low of 68.80 (on 28.08.13) & ended at 62.58 by 30.9.13. It further gained to end at 61.80 on 31.12.13. In order to arrest steep gain of INR, RBI bought USD.
 ^ 31.12.13: 61.80 30.09.13: 62.58
Jun.2013-Sep.2013 Sold $14.24 billion
During the 1
 week of May 2013, INR was hovering around 54. US Fed hinted at Fed tapering on 22.05.13. From 54 in the middle of May.13, INR fell heavily to 68.80 by 28.08.13. RBI sold US dollar to prevent INR falling heavily against USD.
30.09.13: 62.58 28.08.13: 68.80 31.07.13: 60.86 30.06.13: 59.39 31.05.13: 56.58 22.05.13: 55.66 30.04.13: 53.69 31.03.13: 54.29
 RBI in September 2013 created two swap windows for FCNR(B) funds and Banks' Overseas  Borrowings. Through them, it collected USD 34 billion till 30 November 2013—part of this  foreign exchange was added to India’s foreign exchange reserves.
Movement of Forex Reserves in FY 2013-14:
 Accretion or depletion of India’s forex reserves depends on rupee exchange rate, capital inflows to India and RBI’s net intervention in the markets. India’s latest foreign exchange reserves, as on 11 April 2014, stood at $309.44 billion (out of  which gold accounts for $21.57 billion). From a level of $292.65 billion at end-March 2013, forex reserves came down by $17 billion to $275.50 billion by the end of August 2013—as rupee fell sharply against the dollar and RBI was selling dollars to prop up rupee (see above table).  As rupee started appreciating since the end of August 2013, RBI started adding reserves. Between September 2013 and December 2013, reserves rose by $20  billion to close at $295.71 billion (end-Dec.2013). At the end of March 2014, India’s reserves stood at $303.67 billion, with further addition of $8 billion.
To Sum Up:
Compared to the period of May.2013-Dec.2013, Indian rupee’s volatility has come down to a great extent providing some cheer to the financial markets. The drastic reduction, engineered by the Indian government, of current account deficit in FY 2013-14 has also contributed to the rupee appreciation and to the relative stability of the exchange rate. India’s national elections are underway right now and the future movement of exchange rate will much depend on the structural policies that the next government will bring to the Indian economy.
My Recent Tweets:
 As RBI buys US dollars to shore up India's forex reserves, it releases rupees into the banking system. Won't this lead to higher inflation?
— RamaKrishnaVadlamudi (@vrk100)  April 20, 2014 

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