RBI buying dollar to keep rupee steady

Mumbai: Ripple effects of public stock listings, such as those of Zomato, GR Infraprojects and Clean Science and Technology, are already being felt beyond Dalal Street, with Mint Road intervening frequently in the currency market to mitigate the impact of surging overseas cash inflows and ensure a stable trading peg for the Indian rupee against the dollar.

The Reserve Bank of India (RBI) has reportedly bought up to even a billion dollars a day lately, four top foreign-exchange dealers at large financial institutions told ET, potentially risking paltry returns on its already record stash of foreign exchange. But the central bank’s move is aimed at ensuring the rupee’s export competitiveness against a basket of emerging-market currencies that are also seeking a bigger share in global trade.

In the past three days, the RBI is estimated to have bought about $2 billion worth of foreign currency.

Dollar Buy Via State-Run Banks
The central bank did not respond to ET’s queries on the subject.

“The rupee would have gained because of the massive overseas funds pouring into mega initial public offerings,” said Anindya Banerjee, currency analyst, Kotak Securities. “The currency market saw dollar demand from public sector banks, helping prevent an abnormal rise in the local unit. But the dollar acquisition would have a cost, possibly impacting the central bank’s balance sheet.”

The rupee closed marginally lower at 74.59 to the dollar Wednesday, and has remained largely stable through July despite inflows of an estimated $5 billion in portfolio purchases, initial share sale bids, and foreign direct investments in the unlisted space. Web-commerce company Flipkart raised $3.6 billion two days ago, while ride-hailing service Ola also drew overseas capital lately. Both are unlisted.

The RBI is likely to have bought in the spot market but conducted a 'sell-buy' swap (a derivative transaction) in the forwards market, ensuring that payments are made at a future date. This helps keep liquidity in the system unchanged despite RBI's currency-market interventions, as dollar purchases would otherwise immediately release rupees into the financial system that already has a surplus of Rs 5.61 lakh crore.

The RBI bears a ‘cost of holding’ for its 'buy side' market interventions. Mint Road may be earning 1-2% from its dollar-based investments, but it faces annualised forward premium costs of 4.5%, dealers said.

Average earnings on RBI’s forex assets were 2.1% in FY21, dropping from 2.65% in FY20.

“There will be a cost to dollar purchases,” said Madan Sabnavis, chief economist at CARE Ratings. “But it could be absorbed, given the large size of the RBI balance sheet.”

In July, foreign portfolio investors purchased a net of about Rs 1,300 crore of local equities in the primary market until July 13. In June, the net purchases were at Rs 7,600 crore. Purchase data of the Zomato initial public offering (IPO) are not available yet.

“Some state-owned banks were seen buying dollars at the direction of the RBI amid overseas inflows into local IPOs,” said the chief currency dealer at a local bank.

India's foreign exchange reserves touched a record of $611 billion last month.