RBI took a break from buying dollars as Indian rupee’s weakness renews1 min read . Updated: 16 Sep 2019, 09:07 AM IST
- The rational of RBI is that it intervenes to contain volatility and not to tie the exchange rate to a specific level
- Global markets too were calmer in July than other months despite the undercurrents of a trade war
Mumbai: India’s central bank had been buying dollars for seven consecutive months even when the rupee had been under pressure.
But Reserve Bank of India (RBI) seems to have finally a taken break in July from its dollar buying spree. Latest data from the central bank showed that it was a net seller of dollars for the first time since November 2018. RBI releases its forex intervention data with a lag of two months.
Considering that there were dollar outflows from domestic markets in July, the central bank would have found limited opportunity to buy dollars without putting pressure on the exchange rate.
What perhaps could also be the reason is a surplus rupee liquidity conditions in domestic markets. RBI’s forex interventions have an impact on domestic liquidity. When the central bank buys dollars, it injects rupees into the banking system and when it sells dollars, rupees are absorbed.
The rational of RBI is that it intervenes to contain volatility and not to tie the exchange rate to a specific level.
To be sure, global markets too were calmer in July than other months despite the undercurrents of a trade war.
That said, the tussle between US and China over trade has continued to keep most emerging market currencies under pressure. The Indian currency has had an added trouble due to weak domestic macroeconomic indicators. With economic growth fumbling, the rupee is under fresh pressure and has already weakened nearly 4% over the last two months.
Analysts expect the currency to drop to 73-74 to a dollar by December Currently, rupee is hovering around 71.50 per dollar levels.
The surge in oil prices today has created fresh trouble for the rupee. An increase in oil prices bloats up the import bill of the country and thereby adds to the pressure on balance of payments.
If the rupee comes under renewed pressure, the RBI may find less opportunity to buy dollars in the coming months.