Mumbai: The Reserve Bank of India likely intervened in the foreign exchange market to support the rupee as the currency faced pressure from volatile oil prices and weak portfolio flows, five traders said on Wednesday.
The rupee was trading at 95.7325 against the US dollar, down 0.1 percent from its previous close of 95.59. Traders said the RBI's intervention in the spot market appeared to be intermittent rather than aimed at keeping the currency at a particular exchange rate.
State run banks were also seen conducting dollar and rupee sell buy swaps. Traders said the transactions were likely carried out on behalf of the RBI and were intended to drain excess rupee liquidity from the banking system.
The RBI has been taking measures to manage the rupee and domestic liquidity at the same time. Its recent actions include sales of government securities, foreign exchange swaps and operations to absorb surplus cash from banks.
The banking system's liquidity surplus stood at about 4.44 trillion rupees, or $46.38 billion, on Tuesday, according to the latest market data. That was the lowest level in nearly four weeks and about 60 percent below the record surplus of 11.16 trillion rupees reached on September 6.
The sharp fall reflects the RBI's recent efforts to absorb excess liquidity. On September 22, the central bank absorbed 71,971 crore rupees through an overnight variable rate reverse repo auction. The RBI had notified an auction size of 75,000 crore rupees, with the accepted bids carrying a weighted average rate of 5.24 percent.
The central bank has also been selling government securities through open market operations. It sold securities worth 50,000 crore rupees on September 17 and another 25,000 crore rupees on September 21. A further sale of 25,000 crore rupees is scheduled for September 28 as part of a total one lakh crore rupee programme.
The large liquidity surplus developed after Indian banks attracted a much larger than expected amount of foreign currency through a special deposit scheme, while other factors also added to liquidity in the banking system.
The special foreign exchange mobilisation programme attracted $143.6 billion in total inflows by September 18. Of this, $132.98 billion came through Foreign Currency Non Resident deposits as of August 31. Other inflows came through overseas foreign currency borrowings and external commercial borrowings.
The foreign currency inflows brought large amounts of foreign exchange into the banking system, while subsequent swaps with the RBI contributed to higher rupee liquidity.
The RBI is now gradually removing some of that surplus liquidity from the banking system. This is important for monetary policy because large amounts of surplus liquidity can push short term market interest rates lower and affect the transmission of the central bank's policy stance.
The rupee is also facing pressure from developments in global oil markets. India is a major importer of crude oil, so higher oil prices can increase demand for US dollars from Indian importers and put pressure on the domestic currency.
Oil prices have remained volatile amid continuing geopolitical tensions and uncertainty around the Strait of Hormuz. Changes in expectations about the situation have caused movements in crude prices, adding to uncertainty for the rupee.
Foreign portfolio flows are another factor affecting the currency. Traders have pointed to weak portfolio flows and strong demand for dollars from importers as additional pressures on the rupee.
Market participants have reported several instances of likely RBI intervention in the currency market this month. The exact size of the latest intervention remains unclear.
The recent developments show that the RBI is dealing with two closely connected challenges. It is seeking to limit excessive volatility in the rupee while also reducing an unusually large surplus of cash in the banking system.
The liquidity surplus has already fallen by more than half from its September peak. However, the banking system still holds a substantial amount of excess cash, suggesting that liquidity management will remain an important issue for the central bank in the coming weeks.
For now, the RBI's actions point to continued efforts to manage the rupee, absorb surplus liquidity and limit the impact of external pressures on India's financial markets.