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Charts & Analysis

Chart: RBI Sells $7.3B in Jan ‘12

The RBI had sold another $7.3 billion in Jan 2012, taking the FY 2011-12 (Apr to Mar) cumulative figure to net sales of $19.8B.

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On a cumulative basis, this is substantial but nothing compared to the amount the RBI bought in earlier years:

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More than $78 Billion was bought by the RBI in 07-08, and in 2008-09 as well, we saw a lot of dollar buying (more than $26 bn) along with the selling (about $62 bn). Since then the RBI stopped large scale interventions in the market – some small buys here and there would result in a minor figure. In fact from Dec 2010 to August 2011, the RBI did not trade in the market at all. (if they are to be believed)

So this year isn’t great in numbers, though it’s much higher than the last two years. The difference really is that in 2010 or so, the RBI had sworn to not intervene in the forex market, but it did.

  • Anon says:

    Deepak,
    1) The $7.3 bn figure is for Jan ’12, not Dec ’11. The figure for Dec ’11 was $7.8 bn.
    2) These figures corroborate my theory of the OMO being used as an instrument to replenish Rupee funds drained due to RBI’s actions in the forex market. Cumulatively during Nov, Dec and Jan – Rupee funds drained due to RBI’s forex actions have been about 100,000 crores whereas fund infusion through OMOs have been about 80,000 crores. If we adjust for the fact that RBI has rejected several bids in the OMO auctions, since market participants tried to act smart and quote prices well above fair market value, we’ll probably find that the amount RBI was willing to buy through OMOs probably matched the amount of rupees sucked out of the system due to their forex market interventions.

    • Fixed, thanks. Stupid Excel label that I copied 🙂
      OMO fund infusion till Jan was, according to the bulletin, 78,000 cr. or so. RBI Bond purchases are fungible, in a way, so it’s not clear if we can make the link primarily to forex purchases and not to bond selling or liquidity (worse since the OMOs were perhaps concidentally, on the same Friday as bond auctions). RBI still calls it for an overall liquidity issue. Plus, we don’t know how much the RBI had sold each week, which we can corroborate with the OMOs (the first few saw less than 80% acceptance like you said 🙂 ). But yes, the OMOs were to handle the liquidity deficit created by RBI dollar sales + bond sales or Advance tax (temporarily). If there are other issues, like bank capital impairment, they’re hidden in this (and hopefully not too much).
      I had mentioned in the past that I prefer the RBI cutting down reserve money growth by selling dollars, which would cut inflation faster than rate cuts if rate cuts are ineffective; we don’t know if inflation’s down because of a high base, or because of the rate hikes, or even because of the slowing reserve money growth, but in the end a money supply growth at the primary end will surely impact inflation; and an orderly slowdown there will cut inflation when it’s persistent through rate hikes. And overall, it’s healthy to have your central bank own the country’s bonds, not forex reserves; it sets up the way for the longer term freeing of the rupee and making it fully convertible. Even now, forex reserves are around 75% of our reserve money when I think it should be 5-10%.
      On another note, our money supply to GDP ratio is low as is the M3 multiplier, compared to developed countries, and a good reason for that is that the rupee is only valid for transactions in India. (ok, formally) Free that and the system will change.

      • Anon says:

        Fungibility of funds, yes I understand… and I don’t intend to get into the minutae of timing of the purchase etc…
        But I base my theory on simple facts.
        RBI started intervening in the fx market sometime in November and OMO purchases too began around then… Almost coincidental.
        All the other issues like tight liquidity, bond sales etc. had existed even before – but OMOs as an instrument began to be used only when they began their forex market interventions – which was around November.
        Of course, now they are probably forced to continue using it (even if their forex market interventions have stopped) as, structurally, money market liquidity has become extremely deficient.
        On deliberate squeezing of reserve money (through whatever means), I’d be very cautious – it’s like using a sledgehammer on the economy as a whole – and should be used only under extreme circumstances. We’ve been through this deliberate squeeze on reserve money once before (94-95 or maybe 95-96) with disastrous effects on the economy.

        • I could also say that the OMO purchases started after bond sales started devolving, in October 🙂 But it’s fungible, that’s what I mean. Probably all of it is related, even the appetite for govt bonds is also tied to liquidity since the money takes time to come back into the banking system.
          Note: It’s not squeezing of reserve money per se, it’s reducing the growth rate of reserve money. a M0 supply growth of 20% will obviously create high inflation, where productivity benefits are, at best, of the order of 7-8%. So if you cut reserve money growth to 10-12% you will get lower inflation, though it will squeeze some players. An orderly change can be regulated by using OMOs. We had a similar mechanism on the upside that sadly had a fiscal distortionary effect (the MSS bonds issued to remove money given by RBI buying dollars)