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RBI Intervention Is Not Working For The Rupee


The Reserve Bank of India sold just 275 million dollars in April, even as the Dollar Rupee exchange rate rose from 51.1 to 52.5. Data from the RBI Bulletin yesterday shows traded amounts by the RBI in April.


The dollar has been seriously volatile, and the RBI has intervened heavily earlier. When the rupee fell to 54 in December 2011, the RBI picked up its purchases and sold nearly $8 billion of dollars, which helped the rupee recover in Jan-Feb. But that was short lived as the rupee again slid after February, as the import-export gap continued to widen and capital fund flows were stunted.


We don’t know what the RBI did in May. We’ll only know in July since the data is released with a 2 month lag.

What we know: The RBI conducts OMO auctions to fill the liquidity void it creates when it sells dollars. That means, to replenish the rupees it takes out of the banking system when it sells dollars, it uses rupees to buy government bonds and thus money comes back in. The OMO situation over the last few years:


(Source: RBI Press Releases and RBI Bulletin. June data till June 13.)

There was a temporary drop in the purchases of bonds in April, but regular service has resumed, as you can see.

On a different note: there were no OMO auctions in April. All the bonds bought seem to be oil bonds, according to the bulletin. Oil bonds, if you recall right, were what were given to oil companies as the government participation in the oil subsidy. They have not been able to sell those bonds easily. RBI must have bought oil bonds in April, directly from the oil companies, to help pay for crude imports. This will still mean they have to buy dollars and sell rupees in the open market to pay for the oil. There is no direct way for the RBI to sell dollars to oil importers, so this is a workaround.

The takeaways: 

  • The rupee is likely to slide even more. RBI intervention is NOT WORKING.
  • The slide is structural. It’s because our imports are way higher than our exports and the gap is not being bridged, as it has been in the past, by foreign investment.
  • Figures: Import-Export gap is around $110 billion made up by transfers of $65 bn. The rest is financed by ECBs, Equity portfolio investments, NRI deposits etc. Crude is the biggest import at over $120 bn. (net)
  • The slide will continue if our imports of crude and gold continue at the current pace. The imports of crude will not fall unless consumption falls. Consumption will not fall unless fuel prices rise. Only petrol prices have been raised – diesel and other fuels continue to be subsidized. The rupee will definitely keep going down at this rate.
  • The RBI Intervention amounts to about $6 billion a month. Reserves are around $250 billion.
  • If we try to bump up RBI’s intervention to say $12 billion a month, it might help the rupee, but that gives us just 10 months before we halve our reserves. Not going to happen unless we make the rupee capital convertible.
  • The dollar fall is now 25% below the level of last June 13 (Rs. 44.87 versus Rs. 55.85 now). This will cause inflation, even if with a lag.
  • The RBI bond purchases and dollar selling aren’t quite cancelling themselves out. Total dollar selling from Nov 2011 to Apr 2012: Rs. 1.045 billion. Total bond purchases: Rs. 1.47 billion. The excess is additional reserve money being created; if we aren’t careful, this can result in more inflation.
  • There is no point of further intervention, even if seen as politically necessary.
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