RBI's forex intervention eases amid favourable conditions for Rupee

RBI forex intervention: With India witnessing an improving trade deficit, inflows into bonds, and reduced pressure on the Rupee in the offshore market, the need for aggressive intervention by the Reserve Bank of India (RBI) in the foreign exchange market has significantly decreased.

According to the latest monthly bulletin from the RBI, interventions have eased notably, with the central bank purchasing $8.5 billion in February without making any sales. This marks a substantial decline compared to previous months, with gross FX intervention in February hitting a six-month low and representing only about an eighth of the average monthly intervention during October-December.

Vivek Kumar, an economist at QuantEco Research, attributed the reduced FX activity to easing pressures on the Rupee during the January-March period, particularly compared to the preceding October-December timeframe. Factors such as the narrowing of India's trade deficit to an 11-month low in March have contributed to this trend. Economists anticipate India's current account to swing to a surplus in the March quarter.

Insights into the RBI's total FX activity encompass its interventions in both the onshore spot and non-deliverable forwards market, as well as the maturity of forwards. An anonymous source familiar with the central bank's thinking noted that favourable conditions and reduced necessity for offshore market interventions have led to a decline in the gross amount of intervention.

The ratio of RBI's FX activity to the interbank spot and forwards market turnover, although data for total turnover in the non-deliverable forwards market is unavailable, serves as a comparative metric. This ratio witnessed a decline from 0.14 in October to 0.01 in February, signaling a decrease in the extent of RBI's interventions.

The decrease in RBI's forex market activity coincided with the International Monetary Fund's reclassification of India's exchange rate regime from "floating" to "stabilised arrangement" in December. However, Dhiraj Nim, an economist at ANZ Bank, suggested that this decline may have been coincidental.

Looking ahead, forex interventions are expected to focus on purchasing dollars as the central bank aims to absorb inflows and prevent excessive appreciation of the Rupee against currencies like the Chinese yuan, according to Nim.

(With Reuters inputs.)