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After Spot Market, RBI May Intervene In Forward Market

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The Reserve Bank of India (RBI) may intervene in the forward foreign exchange market, in addition to the spot market, to help manage liquidity in the banking system, a central bank source said on Friday. The RBI has been intervening in the forex market since September to stem the rupee's fall. The rupee fell nearly 16 per cent in 2011, making it one of the worst performing currencies in the world. It has, however, recovered smartly in 2012, gaining nearly 6 per cent so far, helped by renewed flows in equity as well as large inflows into debt. "If and when we are doing it (intervention), we may do a combination of spot and forwards, so liquidity impact is shifted to a future date," the source said. The central bank has been active in the forex market in recent months, in a bid to prop up the rupee. Traders have routinely suspected the RBI's hand in the market, especially in late hours of trade. The official central bank intervention data comes with a month's lag. The RBI sold $2.92 billion in the spot market in November, its biggest sale of dollars in over two-and-half years. Net outstanding sales stood at $1.62 billion in the forward market in November, the first time the RBI has intervened in the segment in over a year. Wednesday, RBI deputy governor H.R. Khan said that any central bank intervention, as and when it happens, will be a combination of both cash as well as forward basis. "But there is a limit upto which you can do forward because then the premiums will disturb other rates," he said, adding the amount is decided based on the market condition. Banks borrowed 1.59 trillion rupees from the central bank's repo window on Friday, compared with 1.45 trillion rupees on Wednesday, and significantly higher than the RBI's comfort zone of 600 billion rupees, indicating the tightness in liquidity. Tuesday, the central bank slashed its cash reserve ratio by 50 basis points to inject 320 billion rupees in the banking system. The cut will be effective Saturday. In addition, it has bought 700 billion rupees of bonds since November to support the government's large borrowing programme. At 2:45 p.m. (0915 GMT), the rupee was at 49.46/4650 to the dollar, after touching 49.44, its highest since November 9, and firmer than 50.09/10 at close on Wednesday. The market was closed on Thursday for a local holiday. (Reuters)