September 28, 2022
  • September 28, 2022

RBI’s Aggressive Forex Intervention and the Way Forward – The New Indian Express

By on May 29, 2021 0

The Center struck a rich vein last week with the RBI transferring a larger-than-expected dividend of nearly Rs 1 lakh crore. This was more than double the budget planned by the government and, given the meager revenues, it softens the potential for stimulus.

The unexpected bounty was the result of the aggressive selling of currencies by the RBI, with gains up an unprecedented 69% in FY21.

Between July 2020 and March 2021, it sold for $ 85 billion compared to $ 20 billion last year. Of that, $ 62 billion was sold in the last three months of FY21, which only shows how the RBI went out of its way to save the Centre’s strained finances.

The RBI was also a net buyer of currencies in FY21, having bought $ 88 billion net in the spot market, making the rupee the worst performer among Asian currencies and placing India on the list. monitoring of the US Treasury for currency manipulation.

Foreign assets grew 11.5% last year, but any further growth will not be without consequences. With banks depositing excess liquidity with the RBI as part of the reverse repurchase window, the central bank’s main policy tool – the repo rate – is rendered ineffective in supporting the economy and countering the threat of reverse repo ‘a rise in inflation.

Thus, some believe that the RBI’s aggressive foreign exchange intervention helped manage short-term yields and price increases. By the central bank’s own admission, the appreciation of the rupee last year helped contain imported inflationary pressures by lowering the bill for oil imports, among other things.

So should the RBI continue to go into the forex market with an open hat? Certainly not, as a higher forex-induced dividend forces it to face the trilemma of managing balance sheet expansion, bond yields and rupee volatility.

While this may have eased the strain on public finances this fiscal year, it reduced the RBI’s economic capital to 21.7% of total assets, from 26.7% last year. Going forward, the central bank needs to intelligently balance bond purchases and foreign exchange assets without affecting the yields and appreciation of the rupee, which could be counterintuitive and further reduce its economic capital.