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RBI Buys $12 billion in January, Returns to Expansionary Balance Sheet?

RBI bought dollars by the truckload in January, it turns out. Over $12 billion was purchased in Jan 2015, which is the largest single month of dollar purchases since January 2008!

Even then the rupee appreciated from the 63.8 levels it saw end-December, to the 61.76 levels in January.


When RBI buys dollars, you would expect the rupee to fall, since the demand for dollars is high (with the RBI buying). And the rupee, therefore should fall. But the dollar fell and the rupee gained, which tells you how strong the incoming flow of dollars was – the demand for rupees was even higher.

FIIs bought over 33,000 cr. worth of debt+equity in Jan 2015, with most of the money coming in as debt:


There’s something in here that doesn’t make sense:

  • Portfolio investors (FIIs, FPI) bought Rs. 33,000 cr. or $5.5 billion
  • FDI came in at $4.5 billion (Source: DIPP)
  • This still adds up to $10 billion only, and RBI bought over $12 billion as the rupee appreciated.

What then has caused the rupee to appreciate? Higher remittances? Lower imports? These numbers too don’t match up.

There is a lot of weirdness going on around numbers these days – what we are being told are FII investments simply don’t match the direction of the dollar-rupee trade, or the market moves. A number of market players too are flummoxed. There is something fishy in there, but I can’t yet put my finger on it.

Anyhow, the final chart – the RBI has been cutting its exposure to forwards:


(Remember, the RBI has a massive $26 billion to pay back by November 2016 as part of the FCNR unwinding. (It had a 3 year FCNR swap for banks in Nov 2013 where it allowed banks to raise dollar deposits, giving them a fixed 3.5% hedge if they put those dollars with the RBI. The dollars are returnable in three years, which is Nov 2016)

The dollar forwards are down by $1.2 billion, which might have been converted to dollar spot holdings instead.

What Worries Us: Inflation!

The only thing to be worried about is:

  • The RBI has bought $12 billion, and has printed over Rs. 75,000 cr. in the month.
  • This money hasn’t been sterilized and it’s new money being added to the system
  • It scares us because RBI’s balance sheet has begun to grow again, after a remarkable effort to keep it under control.

The RBI just collects reserves. It has zero intention of selling dollars to protect the rupee on the downside (i.e. when the rupee falls) because it is too afraid to give up its precious reserves. But if the rupee should appreciate, it will immediately step in and buy. This is a sureshot recipe for inflation, and we have just managed to counter its effects (by smart control of the balance sheet by Rajan) till now. Will he now just give it all up and let us go back to the age of high inflation?



Note: Don’t get all bearish. Such posts are macro-economic and have very little to do with market responses on an immediate basis.


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  • Balance sheet does not always cause inflation. For proof, look at US. Reasons behind RBI keeping printing press running were different last time. Most of it went to wasteful expenditure. Now forex reserves are rising instead. So it does not cause run away inflation at this pace of printing new money. Here is my take:

    • Printing was always used to buy reserves. No difference. “Wasteful expenditure” is not by the RBI it’s by the government and the RBI is not funding our deficit.
      The US is a different case, Broad Money Supply isn’t increasing by much even though narrow money (balance sheet of CB) is increasing. This is the case with EU and Japan as well…

  • Rajnish says:

    Inflation is caused by government running HIGH deficits and RBI printing money to finance that, which was the case in 2009-11. On top of that the commodity prices were high and rising. Now the government is running a much smaller deficit, the RBI printing is only to keep Rupee from appreciating too much, and the commodity prices are down and showing no sign of a rise in hurry.
    I think we are going be surprised by how low and long the inflation will fall, just as we were by how high and long it did in 2009-11 period.

  • rohitms says:

    This really makes me think about the causes of inflation in the first place. Is it monetary, or currency. And to what extent can a strong currency hold back inflation even as money expands, after all imports can compensate. But again imports can eventually kill currency strength. The real solution is then using the INR to pay for imports that would be the real winner.

  • Gold Bug says:

    No Pollitician in any country except Germany will stop “wasteful spending” to loose their vote bank. If any CB Governer does not co-operate they can go to the extent of threatening him with Jail sententece like Turkey. The losers are diligent savers (mostly risk averse Retirees) who are being reduced to penury by these policies. In US/EU/Japan these retirees get Social Security/Medicaid but in India retirees have zero support. The winners are those linked to corrupt system. RBI Governor is now in full sync with Fiscal Policy.

  • Aditya Agarwal says:

    Are you a Libertarian? Follow the Austrian School?