Limited RBI Intervention To Stem Rupee Fall-VRK100-13Jan2012

Limited Direct RBI Intervention

To Stem Rupee Fall

Rama Krishna Vadlamudi, HYDERABAD   13 January 2012
www.ramakrishnavadlamudi.blogspot.com

According to the latest data released by Reserve Bank of India, the net sales of US dollars in the month of November 2011 amounted to $ 2.92 billion or Rs 14,800 crore. This sale of dollars indicates that the RBI had directly intervened, though in a limited way, in the foreign exchange markets to stem the sharp fall of Indian rupee against the US dollar since August 2011. In 2011, the rupee fell by about 20% against the dollar.

The RBI has resorted to direct intervention by selling US dollars to arrest the fall of Indian rupee. This is despite the stated position of RBI not to resort to direct intervention except in circumstances of what it calls as “extreme volatility.” The cumulative net sales of US dollars by RBI from September through November 2011 amounted to $ 4.7 billion or Rs 23,689 crore.

The rupee fell sharply from a level of 44.75 in the first week of August 2011 to 52.70 in the third week of November 2011 prompting RBI to sell US dollars which temporarily halted the sharp decline of rupee. But later the rupee fell further to levels of 54 in the third week of December 2011 before rising. (The rupee closed at 51.57 on 12 January against the dollar). The latest data from RBI indicates that the RBI should have intervened directly in the foreign exchange markets in December 2011 also.

The figures for the month of December 2011 will be known only in the second week of February 2012. RBI announces data on sale and purchase of USD with a lag of two months. The data for the month of November 2011 is released now. 

The data till November 2011 confirms the market rumours of direct intervention by RBI. The RBI has also taken some indirect measures to boost confidence in the markets to arrest the sudden and sharp rupee depreciation.  

Sale/Purchase of US Dollars by Reserve Bank of India

Month	Purchase (+)	Sales (-)	Net (+/-)	Outstanding
				Net Forward
	US Dollar	US Dollar	US Dollar	US Dollar
	Million	Million	Million	Million
2011:Nov	-	2,918	-2,918	-1,620
2011: Oct	-	943	-943	-
2011:Sep	-	845	-845	-
2011: Aug	-	-	-	-
2011: Jul	-	-	-	-
2011: Jun	-	-	-	-
2011: May	-	-	-	-
2011: Apr	-	-	-	-
TOTAL 2011-12	-	4,706	-4,706	-1,620
TOTAL 2010-11	2,450	760	1,690	-
TOTAL 2009-10	4,010	6,645	-2,635	370
TOTAL 2008-09	26,563	61,485	-34,922	-2,042
TOTAL 2007-08	79,696	1,493	78,203	14,735
TOTAL 2006-07	26,824	-	26,824	-
TOTAL 2005-06	15,239	555	14,684	-

              Source: RBI

As shown in the above table, RBI resorted to heavy buying of US dollars during the financial years 2005-06, 2006-07, and 2007-08. During those years, India was enjoying surplus position in current account (total exports higher than total imports). In addition, India received heavy inflows from the Foreign Institutional Investors (FIIs) due to optimism in the stock market.

But, the FII flows into stock markets reversed in 2008 due to heavy selling in Indian stock markets; and collapse of Lehman Brothers Inc in September 2008 that led to meltdown in global financial markets. During 2008-09, RBI had been forced to sell US dollars to arrest the rupee fall with the net sales of dollars amounting to $ 35 billion – this is against total net purchase of US dollars by RBI amounting to $ 120 billion between 2005-06 and 2007-08.

As per the above table, the outstanding net forward (sales) position as at the end of November 2011 is $ 1.6 billion.

Outlook on Rupee

After touching a low of 54.68 on 14 December 2011, the rupee has appreciated to levels of 52 now due to a variety of factors, that include, limited direct intervention by RBI, indirect measures taken by RBI, resumption of FII inflows due to strength in equity markets with the Sensex reclaiming 16,000-level, and steps taken by RBI to curb speculation.

The rupee has been facing pressure from various quarters – right from the Eurozone crisis, strength of dollar against other major currencies, India’s rising current account deficit, sharp rise in short-term external debt, concerns about lack of policy initiatives from the Indian government, slowdown in India’s GDP growth, etc.

There are some expectations in the market about RBI cutting interest rates in the near future with the coming down of food inflation and signs of overall easing on the inflation front. If RBI starts cutting interest rates, one can expect some more inflows from FIIs into the stock markets.

The movement of rupee against dollar will depend on several factors as mentioned above. If the Indian government moves forward with some policy initiatives, we can expect the rupee to strengthen. However, with several state elections taking place in the few months, one cannot be too sanguine about policy initiatives. Overall, the outlook for rupee remains hazy.

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Read more about the Indian Rupee:

Indian Rupee Continues to Fall

Reasons for Indian Rupee’s Fall

Stocks, Bonds, Rupee and Inflation

Foreign Exchange Losses and India Inc

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Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. The author has a vested interest in the stock markets. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

www.ramakrishnavadlamudi.blogspot.com