The Reserve Bank of India (RBI) may keep buying dollars to prevent the rupee from losing export competitiveness. Sterilising the dollar inflow and simultaneously sucking out the resulting rupee liquidity assumes importance as an inflation-targeting central bank seeks to lower the consumer price index (CPI) to levels within the mandated 4-6% band.
India has amassed $100 billion since the lockdown and used it to buy US treasury bills. RBI is also among the top 10 buyers of US treasury bills. The country’s foreign exchange reserves stood at $578.6 billion at the end of December 11.
“RBI may not tinker its stance substantially. In the scenario of excess global liquidity, it’s natural that the central bank continues its strategy of buying dollars,” said Partha Ray,professor of economics at IIM Calcutta. “It’s doing what is known as standard in central banking practice.”
The developed economies have deployed a massive $11 trillion so far – about four times of India’s gross domestic product — to support economic recovery post Covid-19, and this is flowing toward emerging economies.
“RBI has over the years maintained that it does not try to determine rupee levels but only smoothens out volatility in rupee value. So when overseas inflows into stock markets come like they have been, over $6-8 billion in the last six weeks, one should expect RBI to buy dollars to keep rupee value steady and not let exporters suffer adversely due to rupee strength,” said Harihar Krishnamoorthy, global markets head at FirstRand Bank India.
In 2018 too, RBI remained unfazed when the US Treasury put India under the ‘manipulator’ category.
In the RBI’s Monetary Policy Committee (MPC) meeting, members backed the central bank’s forex marketactions.
“The intervention that is raising foreign exchange reserves is required because over-valuation of the rupee can hurt exports, raise country risk and lead to a sharp depreciation later. Prolonged inflows can lead to over-valuation without intervention,” MPC member Ashima Goyal said, according to minutes of the December 2-4 meeting. The meeting, however, took place before the release of the US Treasury Department report.
Most of the reserves are deployed in almost zero yielding US treasury securities. With a total exposure of $222.4 billion in US treasuries as of end October, India has emerged as the top 10 foreign buyers of US debt. India has hiked its exposure to US treasuries by $66 billion since March.
However, the interest it earns on deploying dollars in the US treasury bills is linked to global yields, which are far lower than the 3.35% paid on an average daily surplus liquidity generated through conversion of dollars to rupee or sterilisation of dollar inflows, estimated at more than Rs 4 lakh crore.
