As rupee continues to slide, RBI may be back to spot intervention

India’s central bank may be pivoting to the spot market from forwards in its attempts to shield the rupee from fresh record lows -- in order to minimize the knock-on effects of its intervention strategy.

Reserve Bank of India’s foreign-exchange reserves have fallen by about $30 billion since the end of May to $573 billion, according to its data. While part of the drop is likely down to revaluation due to a stronger greenback, economists say the RBI has also been selling more spot US currency after previous interventions via forwards caused dislocations in that market. 

In the April-May period, when the RBI ramped up forwards intervention, annualized one-year dollar-rupee forward premium slid. That caused importers to aggressively cover their unhedged exposures and exporters to stay away, putting further depreciation pressure on the rupee. 

“This might explain why the central bank has returned to spot reserves for intervention purposes,” said Radhika Rao, senior economist at DBS Bank. The RBI’s strategy “caused distortions, as the unwinding of the long forward position pushed forward premia down sharply.” 

Dollar-rupee one-year annualized forward premium fell to 2.86% in June as the RBI ran down its long forwards book by $16 billion to $49 billion in two months to May, RBI data showed. It bounced back to 3.18% on Monday amid signs of slowing forward market activity. 

The RBI will deploy its reserves to contain rupee volatility, and let it align with fundamentals and not allow jerky or bumpy movements, Governor Shaktikanta Das said last week. The central bank has likely been a net seller in the spot market to the tune of $12.4 billion in the four weeks to July 15, Bloomberg Economics estimated.

“While May and June saw RBI being more active on the forwards and futures front, there is a possibility that the intervention mix now has spot as a key tool to defend the INR, especially when seen in the light of recent fall in FX reserves,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.