RBI Sold At Least $8 Billion Last Week to Support Rupee; Bankers Estimate Sales Up to $15 Billion

The Reserve Bank of India stepped up its foreign exchange intervention last week, selling at least $8 billion to support the rupee, according to estimates from six bankers cited in a Reuters report. 

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The bankers estimated the RBI's market presence at between $8 billion and $15 billion for the week ended September 4. One banker estimated dollar sales at around $15 billion, while another put them at nearly $10 billion-$11 billion. The latter estimate was at least three times the amount sold in the previous week. 

The intervention helped the rupee rise to 94.2850 against the US dollar on September 3, its highest level in more than two months. 

Policy-led dollar inflows give RBI more room 

The RBI's increased intervention has come alongside a sharp rise in foreign currency inflows. A discounted hedging facility for overseas borrowings by state-run firms and banks, along with a free-of-cost hedging facility that allows banks to raise overseas foreign currency deposits, has attracted more than $136 billion. 

The inflows have given the central bank greater room to conduct foreign exchange operations, according to the report. 

The RBI's dollar sales also withdraw rupee liquidity from the banking system. This comes after excess liquidity had reached a record level. A high liquidity surplus can push interbank borrowing costs below the policy rate and affect the transmission of monetary policy. 

Forex reserves cross $740 billion 

India's foreign exchange reserves stood at a record $740.8 billion as of August 21. J.P. Morgan estimated that the figure had since likely moved above $750 billion. 

The higher reserve position has provided the RBI with greater capacity for intervention in the currency market. 

The RBI's recent dollar sales have also been aimed at encouraging exporters to bring more dollars into the market, according to the report. 

Importers increase dollar hedging 

Concerns over rupee weakness have kept hedging activity tilted towards the dollar. Importers have increased forward purchases to protect against a possible depreciation in the rupee, while exporters have held back dollar sales while waiting for better exchange rates. 

The rupee had fallen to 96.96 in May before recovering to 94.2850 on September 3. Goldman Sachs expects the currency to remain within a narrow range over the medium term and does not see stronger external balances leading to a sustained upside. 

The RBI is also expected to use future foreign currency inflows to reduce its forward foreign exchange liabilities. Three economists cited in the report estimate that these liabilities have likely crossed $200 billion.