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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.
    • rohit says:

      I think, as per RBI said that our fundamentals are weak and we need to improve on that first.
      RBI intervention is very very short term solution and risky in the future.
      On what basis we are thinking to invite foreign investor ?
      We lack huge infrastructure…its pending from so many years…unless we improve such issues growth from here is not so easy.

    • RBI just crashed all hopes. However the rates will come down over the nex few months given the sluggish growth and lower credit offtake.
      Investors should look at #NSEL investment products a great new investment product that offers high yields 13-14% over the last two years and carrying low risk.

    • Mohammad says:

      Beyond doubt, depreciation of the rupee faorvus the exporters as they simply get more rupees in exchange for US $1. Likewise, the importers are required to pay more rupees in exchange for US $1 which translates into an appreciable currency cost depending on the transaction volume. Inevitably, the more the rupee depreciates, the more profitable it becomes for the exporters and the costlier it gets for the importers.In the larger picture, because Sri Lanka’s imports far outweigh its exports in terms of their monetary value be it in Rupee or US Dollar, the depreciation of the rupee puts the country at a serious disadvantage. However, even in this situation, what’s positive about the depreciation of the rupee, on the whole, is that it can serve as an imports deterrent. Because when the import costs go up, imports consumers are forced to pay a higher price for the imported goods.To some extent, this discourages the consumption of imports which leads to less imports and consequently less outflow of the country’s wealth. This way, in the course of a year, we may be able to save millions of rupees, if not billions. But this’s neither that simple nor that smooth. The process entails vast ramifications across the whole economy. Less imports necessarily translate into less import levies. Also, less imports of consumption goods may result in a lower standard of living.Where the imports are capital goods rather than consumption goods, this contributes to choke off production which in turn results in poorer supply of products and services and consequently in lower standard of living.In terms of the theory of Comparative Advantage, it may be cheaper for us to import certain products than produce it locally. But, since the devaluation of the rupee adversely affects all kinds of imports, it is important for the CBSL and other relevant authorities to consider all the factors and assess their relative merits and demerits and formulate the optimal strategies and take remedial action where necessary.Moreover, I suggest that our policy-makers should thoroughly review our imports policy and make a comprehensive assessment of its consequences both in the short term and in the long term and introduce necessary amendments. And the devaluation of 20% of the rupee within just six months doesn’t strike us as a sound currency exchange policy.While we must all be ready to sacrifice a little in terms of consumption of import goods, the authorities concerned should pay meticulous attention to what we gain and what we lose on the whole and keep it mind that each mistake by them- particularly in the form of misguided policies or those deliberately designed to benefit a certain section of the population- leads to losses of millions, if not billions of the taxpayers’ money. So I appeal to our policy-makers to awaken to the reality and see what’s at the stake.