India's Central Bank Burns Through $20 Billion Defending the Rupee
The Reserve Bank of India (RBI) absorbed roughly $20 billion (about 27.15 trillion won) in funds through its intervention in the foreign exchange market to defend the rupee's value, it was reported on the 29th. The RBI sold dollars outright and also used dollar-rupee swaps—buying dollars back at a set date along with bond sales—to keep too much money from flooding the market. Combined with cash drained by tax payments, Indian banks' surplus liquidity fell to less than half its early-month peak of 11.16 trillion rupees. Even stripping out temporary factors, core liquidity declined from 14.2 trillion rupees on the 4th to 11.5 trillion rupees.
The dollar sell-buy swap works by the RBI selling dollars in the spot market, mopping up rupees, and then buying dollars back after a set period. This absorbs market liquidity for a period without locking up rupees for the long term. Gaura Sengupta, chief economist at IDFC First Bank, estimated the RBI's net dollar sales through spot transactions and swaps at about $18.5 billion (roughly 25.11 trillion won). The $20 billion figure reflects only the net effect of forex market operations on banking liquidity, and actual sales could be larger, though the RBI did not immediately respond to a request for comment.
Forex swaps are emerging as a key liquidity management tool for the RBI. Governor Sanjay Malhotra previously said various instruments, including bond sales and forex swaps, could be used to absorb excess liquidity. The RBI has also exempted FCNR(B) foreign currency deposits of non-residents from cash reserve requirements. As the RBI's swap dealings increased, the dollar-rupee forward premium rose, with the one-year premium climbing about 0.50 percentage points this month. That has raised costs for companies hedging currency risk on dollar debt or import payments.
The rupee remains under downward pressure. On the 29th, the rupee fell to as low as 96.1475 per dollar intraday, its weakest level in two months.
