RBI dollar sale: It is all about pacing future liquidity

The Reserve Bank of India’s (RBI) forex interventions are influenced by not just dollar flows but also domestic liquidity dynamics. Specifically, the central bank makes its purchases and sales of dollars through forward contracts, keeping in mind the future implications on rupee liquidity.

RBI dollar sale: It is all about pacing future liquidity

Latest data from RBI shows that it has sold dollars in the forward market more than the spot ever since March, when the Indian rupee came under increased pressure. Through a forward contract, RBI can sell dollars in future and, therefore, avoid an immediate tightening of rupee liquidity.

The chart shows that the share of forward contracts in the one-three month bracket has risen in the overall outstanding position of RBI. This means the central bank chose to sell dollars at a date within the next three months. Perhaps RBI believes that the banking system can take the hit on liquidity over the next three months.

The share of tenures between three months and one year has fallen in the total outstanding. The RBI perhaps wound down its dollar purchase contracts or took fresh forward sale contracts in these tenures.

In the second half of the current financial year, loan growth is expected to rise. The requirement of liquidity by banks would be high at that time. Hence, dollar purchase contracts maturing during that time would have created disruptions in liquidity at a time when the central bank is expected to progressively tighten.

source: livemint


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