Mumbai: To reduce rupee volatility on account of higher inflows and increase forex reserves to cushion any external shock, the Reserve Bank (RBI) bought the highest amount of dollars, after a gap of seven years, at USD 49.2 billion in April-February of the past fiscal. The central bank net purchased the currency from the spot market in April 2014-February 2015, according to the central bank data, which comes with a lag of two months.
The Reserve Bank had bought USD 115.9 billion from the market during the period while it sold USD 66.7 billion, according to the RBI data. The period also saw the forex reserves touching a record USD 338 billion to the week ended February 27. "With the country's macro fundamentals improving, we have seen robust capital flows," said Yes Bank chief economist Shubhada Rao.
"Simultaneously, we have also seen RBI intervening in the market to cushion volatility, but more implicitly allowing the nominal exchange rate to adjust closer to its fair value, which at present is 64-65 to the dollar after adjusting for inflation and productivity differentials. This has resulted in an improvement in forex reserves," said Rao. "When inflows are more, the supply of dollar increases and it results in rupee appreciation, which is not good for exports.
The RBI buys these excess dollar supply and add to their reserves. This is a way to maintain orderly movement of the rupee," said a senior dealer with a public sector bank. The rupee had depreciated by around 4 per cent in the financial year gone by, against a whopping around 20 per cent appreciation in the previous fiscal, making it the best performing EM currency. Experts say with higher purchases of dollars, the Reserve Bank is also trying to create buffer against any volatility.
"There is an expectation that the interest rates in the US is likely to go up. The RBI is buying dollars to equip itself with enough reserves to avoid volatility," said a senior bank official with a state-owned bank. The Reserve Bank has always maintained that its intervention in the currency market is to curb volatility and not to achieve any particular level.
"Our intervention in exchange market has historically been to reduce exchange rate volatility and that's not just the volatility today but also anticipated volatility," Governor Raghuram Rajan had said at the last policy review on April 7.
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