The central bank bought $ 10.7 billion worth of dollars in the forward market in August. In comparison, it bought $ 8.5 billion worth of dollars in the spot market.
In August, the Reserve Bank of India (RBI) bought more dollars from the forward market than the spot market. This is the first time in six years. The reason for this is that the central bank did not want any pressure on the liquidity of the rupee by buying dollars from its spot market.
According to RBI data, the central bank bought $ 10.7 billion worth of dollars in the forward market in August. In comparison, it bought $ 8.5 billion worth of dollars in the spot market and sold $ 3.2 billion. Thus, its net purchases in August stood at $ 5.3 billion.
Earlier, in May 2014, RBI had bought more dollars in the forward market than the spot. Then it bought $ 20 billion worth of dollars from the forward market. RBI had indicated in August that it would use currency to reduce the pressure on prices due to imported goods. Therefore, he continued to increase the foreign exchange reserves. Buying dollars in the forward market also helps him to maintain local liquidity. The country’s foreign exchange reserves are at a record high of $ 545 billion.
Samir Narang, Chief Economist, Bank of Baroda said, “The policy of buying dollars in the forward market helps the central bank to maintain rupee liquidity in the domestic market. The central bank can choose to take delivery and release liquidity. Or it can be carried forward for some date in future. He can take this decision considering the need for liquidity. ”
Liquidity created by interference in the spot market has to pay the price of absorb, as it requires the issuance of special bonds such as market stabilisation schemes. Such a bond will not be right now, given the fiscal constraints due to Covid-19.
From a long-term perspective, this strategy does not appear to have much impact on the Reserve Management Policy. Rahul Bajoria, Chief India Economist at Barclays, said: “Changes in intervention strategy are unlikely to have a big impact.”
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