The RBI’s package of measures aimed at supporting the rupee attracted more than $20 billion as of July 17, with more than four-fifths coming from foreign currency non-resident (FCNR) deposits mobilised by banks.
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Since these dollars are swapped with the RBI for rupees, they would typically be expected to boost India’s foreign-exchange reserves. However, reserves rose only by about $3 billion between the introduction of the measures and July 10, the latest date for which reserve data is available.
The central bank likely used part of the inflows to offset its short-dollar positions in the forward market, especially in the near-term maturity buckets, according to economists at Citi, HDFC Bank and IDFC First Bank.
The RBI’s net short dollar forward book stood at a record $106.6 billion as of May 31, reflecting its heavy use of forwards to cushion the rupee from volatile oil prices and weak capital flows. Of this, nearly $29 billion was concentrated in near-tenor contracts maturing within three months.
June data, due on July 31, will be watched, with any evidence of reduction in the RBI’s near-term forward liabilities supporting the view that inflows were used to trim the forward book, Citi said.Also Read: RBI issues draft for future-ready rules related to foreign investments
Market participants keenly track the central bank’s forward position since it represents future dollar delivery obligations that could limit the central bank’s room to intervene in currency markets.
OTHER FACTORS
Economists pointed out other factors that could have caused the slow reserve build-up.
Citi cited timing lags in banks swapping deposits with the RBI and hedging future coupon payments, while Sakshi Gupta, principal economist at HDFC Bank, pointed to recent dollar sales by the RBI at a time when the rupee is weakening from a fresh jump in oil prices.
Gaura Sen Gupta, chief economist at IDFC First Bank, added the difference between the inflows mobilised and the increase in reserves could reflect investors rebooking existing FCNR deposits, balance-of-payments outflows and valuation losses.