India’s Forex reserves declined by 1.76 billion USD in the week which ended on the 11th of February. The previous week, the reserves grew by 2.19 billion USD. During the reporting period, the Foreign Currency Assets (FCA) decreased by 2.76 Billion but some of this loss was offsetted by the other growing components of the Reserve. The Gold reserves increased by 952 million, the Special Drawing Rights (SDRs) and International Monetary Fund (IMF) also followed suit by growing by a shy 65 and 16 million respectively.
RBI’s push for conducting a sell-buy swap has come through in hopes of managing the exchange volatility. Sell-Buy swap is when a bank trades their currency for another currency to then later swap out the purchased currency for their own back. As the Dollar has been predicted to be on a steady rise in value, the purchasing of the dollar and reselling it will help increase the current liquidity of the Indian government. In other words, the Rupee will be traded in equal amounts in exchange for the Dollar, since the Dollar is currently projected to appreciate, when the contract ends and the Dollar is converted back into the Rupee the government will have more finance than what was invested originally. Thus increasing the liquidity of the government to fund their expenses.
The RBI plans to hold the purchased Dollar for two years, allowing it to grow and appreciate, then as the contract ends sell the Dollar to increase the (cash available for expenditure) liquidity of the Rupee. This move by the RBI, although standard, is crucial for support amidst the global volatility. The RBI plans to sell-buy $5 billion worth of exchange swaps with a tenure of two years.
In the basket of Asian Currencies, the Rupee, currently, has been resilient. Although the war between Russia and Ukraine will, with almost all certainty, weaken all currencies and the Rupee, similarly, not be an incongruous case. To offset the current pressure of the Dollar outflows on the Rupee, the RBI has been a net-seller of the Rupee since October. The RBI has also been holding a whopping 50 billion Dollars in forward contracts of the Dollar to help liquidate the Rupee. Furthermore, they plan to at multiple points in time, purchase the Dollar during the FY23. This helps to reduce the impact of the Dollars augmentation due to the US Federal Reserves tightening bias.
The sudden and voluminous purchase of the dollar is a double edged sword as the premium for the dollar has increased, making it difficult for importers to book forward dollars. The forward spike could also increase by around 12-15 basis points.
Written and collated by Arjun Kulkarni
With input from Money Control, Times of India and Economic Times.