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 Jan.2014Feb.2014 Oct.2013Dec.2013 Sale/Purchase (net) Sold $2.4 billion Bought $17.50 billion Remarks (in hindsight)
Since Jan.14, INR continued to gain vs USD though in a limited way. 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. ^

17.04.14: 60.29 31.03.14: 59.95 31.12.13: 61.80

31.12.13: 61.80 30.09.13: 62.58

http://ramakrishnavadlamudi.blogspot.in/ Jun.2013Sep.2013 Sold $14.24 billion
During the 1st 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.

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 RBI sold US dollar to prevent INR 30.04.13: 53.69 falling heavily against USD. 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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Net buying of US dollars by RBI b/w Oct.13 and Feb.14 amounts to $15 billion, as per new data. B/w Jun.13 & Sep.13, it sold $14.2 billion. — RamaKrishnaVadlamudi (@vrk100) April 20, 2014 As INR was falling sharply vs USD b/w Jun.13 & Aug.13, RBI sold USD to prop up INR. Later, RBI was buying USD to prevent INR's sharp gain. — RamaKrishnaVadlamudi (@vrk100) April 20, 2014 During times of rupee's volatility, RBI intervenes routinely either to prop up INR or prevent INR's sharp appreciation vs major currencies. — RamaKrishnaVadlamudi (@vrk100) April 20, 2014 --Related Articles: India’s Forex Reserves-Abysmal Returns Fed Tapering is Postponed Spectacular Rise of Indian Rupee Limited Direct RBI Intervention

Disclaimer: The author is an investment analyst with a vested interest in the Indian stock markets. This is for information purposes only. This should not be construed as investment advice. Investors should consult their own financial advisers before taking any investment decisions. The author blogs at: http://ramakrishnavadlamudi.blogspot.in/ http://www.scribd.com/vrk100 Tweets at @vrk100

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