The Reserve Bank of India (RBI) is scaling back its aggressive interventions in the foreign exchange market as conditions turn favorable for the rupee. India’s improving trade deficit, coupled with inflows into bonds and reduced pressure on the rupee in the offshore market, has prompted this easing stance by the central bank.
According to the RBI’s latest monthly bulletin, interventions have significantly eased, with the RBI buying $8.5 billion in February without making any sales. This marks a notable decline from previous months, with February recording the lowest gross FX intervention in six months and only about an eighth of the average monthly intervention during October-December.
Economists attribute this reduction in FX activity to various factors, including the drop in India’s trade deficit, which narrowed to an 11-month low in March. Additionally, India’s current account is expected to swing to a surplus in the March quarter, further alleviating pressure on the rupee.
The decline in RBI’s forex market activity coincides with the IMF’s reclassification of India’s exchange rate regime to a “stabilized arrangement” from “floating” in December. This reclassification may have contributed to the easing stance of RBI’s interventions.
Looking ahead, economists anticipate that RBI’s FX interventions will focus on buying dollars to absorb inflows and limit the rupee’s appreciation against currencies like the Chinese yuan. As conditions continue to favor the rupee and external stability strengthens, the need for aggressive interventions is expected to remain subdued.
While data for the total turnover in the non-deliverable forwards market is not available, the ratio of RBI’s FX activity to the interbank spot and forwards market turnover serves as a comparative metric. This ratio declined from 0.14 in October to 0.01 in February, indicating a significant decrease in the extent of RBI’s interventions.
As the rupee finds stability and favorable conditions persist, investors and market participants await further cues from the RBI regarding its future stance on foreign exchange interventions.
