India’s central bank eases up on currency intervention

Bloomberg

India’s central bank may be reducing its intervention in the currency markets as volumes improve and volatility eases.
The Reserve Bank of India likely sold a net $1.8 billion in the two weeks ended April 10, according to estimates by Bloomberg Economics. That follows likely sales of $7.7 billion in the spot forex market last month, which made the authority a net seller for the first time in seven months.
The need for stability drove last month’s sales after Indian assets got swept up in the virus-fuelled rout that erased trillions of dollars from markets globally, according to JPMorgan Chase. Global funds pulled $16.6 billion from local bonds and stocks in March, sending the rupee to a series of record lows.
“It doesn’t look like the RBI is worried about the rupee weakness as long as the weakness is aligned with the emerging market sell-off,” said Prakash Sakpal, Asia economist at ING Groep NV in Singapore. “I don’t expect much intervention to curb the depreciation pressure.”
The RBI has mostly been on the buy-side of the trade, having amassed $476 billion of reserves that can provide about 12 months of import cover. The authority doesn’t comment on its day-to-day intervention and has repeatedly said it steps in only to curb undue swings in the currency.
RBI spokesman Yogesh Dayal did not respond to an email seeking comments on intervention in the market.
“The RBI was defending the rupee in March from depreciating materially,” said Rohit Arora, emerging market Asia strategist at UBS Group AG. “Since the central bank targets volatility, when it rose dramatically, they were attempting to sell dollars and stabilize rupee and ensure that the markets kept working in an orderly fashion.”
The slowdown in intervention has come since the US Federal Reserve launched a temporary facility allowing other central banks to swap Treasuries for dollars so that they don’t dig into their own reserves so much to intervene. The most likely beneficiaries of the facility are Taiwan, India, Thailand, Indonesia and Malaysia, given that they use Treasuries as collateral and aren’t included in current swap lines, Standard Chartered Plc said in a note earlier this month.
India’s rupee has been the worst performer among Asian currencies in the past month, dropping 2.2% versus the dollar. Poor liquidity opened up arbitrage opportunities between onshore forwards and currency futures as well as offshore rupee. The spread between the onshore and offshore one-month dollar rupee forwards widened by more than one rupee in March, compared with a gap of less than 10 paise seen normally.
RBI’s intervention is aimed at narrowing this spread, according to Kotak Securities.
The rupee may drop another 4.7% to 80.6 per dollar by June end amid capital outflows, according to Bloomberg Economics. The currency was steady at 76.84 per dollar on Wednesday.
“Given the uncertainty surrounding the potential duration of the outbreak and the lockdown, we believe the RBI is unlikely to attempt a hard intervention that would risk quick depletion of its reserves,” said Abhishek Gupta, India economist at Bloomberg.
India’s GDP is set to contract in the April-June quarter as the prolonged lockdown stalls economic activity. Still, the epic collapse in oil is a bright spot for the rupee as the implosion in crude prices gives Prime Minister Narendra Modi more leeway to repair an economy hurt by the lockdown.
The large dollar sales in March do not “signal a shift in the central bank’s asymmetric intervention bias,” Jonathan Cavenagh, head of Asia EM FX strategy at JPMorgan, wrote in an April 17 note. “The need to keep INR FX on the cheaper side will be important, particularly from the standpoint of broader financial conditions.”