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Economy

RBI Trades the Dollar: Buys More in Sep, and Likely Even More in October – Will this cause Inflation?

RBI returns to buying dollars as they reveal in their November bulletin, with a purchase of $1.4 billion in September. This time, they added about $3 billion in forwards as well.

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Including forwards, the total RBI purchase of dollars is the highest in 2014 since 2007-08 at over $56 billion, and the second highest in the last decade.

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More recent data on currency reserves (which increase when the RBI buys dollars) show cash reserves at $316 billion, ($324 bn including forwards). This has now reversed trend since September.

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Impact: The RBI is buying reserves and in the process, keeping the exchange rate constant even as dollars flow in from foreign investors. It’s interesting that the RBI is net buying dollars from the market, even as the rupee is falling! This means there’s an impetus to reduce the impact of the US retreat from QE (which could take money out of India and thus increase the demand for dollars).

If this isn’t appropriately sterlized, such printing of rupees to buy dollars will introduce inflation. The printing in 2007 showed very high inflation in 2009-10 (such things have a two year lag). Will our printing today make life difficult in 2016? Let’s see what the data shows a few months from now.

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  • Kunal Damle says:

    Interesting you should say Inflation coming in later in 2 years. Its pobably OIl coming off that is helping.

  • Rupee is falling BECAUSE the RBI is buying! One does not know the reasons why RBI is doing ths, but I think this buying is currently preventing an economic recovery even though all other factors are favourable. Without this manipulation of the exchange rate, Rupee will appreciatye, inflation will go into negative and industry will revive. Instead, RBI is giving an unjust subsidy to exporters (a priviledged few) financed by the importers (the masses).

  • M3 money supply is at its all time high. But Rajan wants to fight inflation. Probably forex reserves would come down next year after some shake-up.