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Forex market intervention aims met with lower fall in reserves: RBI article

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The Reserve Bank of India (RBI) has been successful in achieving its foreign exchange market intervention goals with a progressively lower drawdown in its reserves, an article by staff of the central bank said.

This is largely owing to the accumulation and timely use of foreign exchange reserves by the RBI, which has enabled the central bank to successfully intervene in the currency market during successive global high-volatility episodes, the article released in the RBI’s August 2022 Bulletin said.

The intervenes in the foreign exchange market through sales or purchases of dollars to curb excessive volatility in rupee.

The views expressed are those of the authors and do not represent the views of the .

The article, which analyses the rupee’s movement since 2007, said there had occurred a general reduction in volatility expectations of the domestic currency.

“In the current Russia-Ukraine crisis and Fed tightening episode, while the drawdown in reserves stands at $56 billion (as on July 29), the net drawdown is much less when the depletion in reserves due to sell legs of swap auctions ($20 billion) and valuation losses is considered,” the authors, who are from the RBI’s Financial Markets Operation Department, said.

“Further, the size of the dip in forex reserves as a per cent to total forex reserves has come down from around 22 per cent during the GFC (Global Financial Crisis) to 6 per cent during the Russia-Ukraine conflict and Fed tightening episode,” they said.

Ever since Russia’s invasion of Ukraine in late February sparked a flow of global funds out of the emerging markets to the safety of the US dollar, the has aggressively sold the greenback to shield the rupee from runaway depreciation.

So far in 2022, the rupee has weakened 6.7 per cent against the US dollar, a lower degree of depreciation than many other emerging market currencies.

At $573 billion, the level of the RBI’s headline reserves as on August 5 were equivalent to 9.4 months of imports projected for 2022-23, the central bank said.

As on March 4, just about a week after the Ukraine war broke out, the RBI’s reserves were at $631.9 billion, accounting for 12.4 months of imports projected for the previous financial year.

The foreign exchange reserves had touched an all-time high of $642 billion in the week ended September 3, 2021. That amount was equivalent to 14-15 months of imports for 2021-22.

“During large parts of the period between 2017-2021, the INR faced significant appreciation pressure on account of large-scale Foreign Portfolio Investors and Foreign Direct Investments inflows,” the authors said.

“Despite this, the realised volatility during this period has been low, as RBI absorbed a significant quantity of inflows in line with its objective of keeping the INR’s volatility low,” they said.

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