India’s Central Bank’s Mysterious Dollar Operations
India’s Central Bank’s Unusual Dollar Operations
The Indian central bank’s recent actions in the foreign exchange market have left many puzzled. The Reserve Bank of India (RBI) has been buying and selling U.S. dollars simultaneously, leading to speculation about the motives behind these operations.
Foreign Inflows and RBI’s Response
Despite significant foreign inflows, the RBI has been actively buying dollars to prevent the rupee from depreciating. In December, overseas investors poured billions of dollars into Indian equities and debt, yet the rupee has remained relatively stable, raising questions about the RBI’s role in absorbing these inflows.
Rupee’s Stagnant Performance
Despite the influx of foreign funds, the rupee has shown little movement, prompting traders and treasury officials to suspect the RBI’s intervention in the market. The currency’s inability to appreciate suggests that the RBI may be absorbing the inflows to maintain stability.
Market Confusion
Traders and analysts are perplexed by the RBI’s dual interventions in the forex market. While the central bank is selling dollars to prevent the rupee from weakening, it is also absorbing any downward pressure on the currency. This unconventional strategy has left the market in a state of confusion.
Implications of RBI’s Actions
The RBI’s intervention in the forex market has broader implications beyond the dollar/rupee exchange rate. The influx of dollars increases India’s forex reserves and adds to rupee liquidity in the banking system, while selling dollars has the opposite effect.
Rupee’s Overvaluation and RBI’s Strategy
The RBI’s actions may be aimed at reinforcing a “low volatility regime” for the rupee and addressing the currency’s overvaluation. According to the RBI’s latest bulletin, the rupee was overvalued by about 5% against a basket of 40 currencies.
As the Indian central bank continues its unconventional forex operations, the market remains on edge, trying to decipher the motives behind these perplexing maneuvers.
