In order to keep the Indian rupee stable, the Reserve Bank of India (RBI) adopted a strategy to shift some of its currency intervention to the forwards market, which has turned out to be a double-edged sword for the country’s central bank, Bloomberg reports.
Key takeaways
“It’s balancing act to keep the rupee stable amid heavy foreign inflows while also keeping excess liquidity in check is flooding the market with more foreign funds, prompting a vicious cycle of interventions.”
“The RBI’s outstanding forwards book grew to $28.3 billion as of November from a negative $4.9 billion in the fiscal year 2019-20, highlighting the extent of its operations. “
“That’s pushed the 12-month implied yields, which typically reflect the interest rate differential between India and U.S., to the highest in more than four years, fueling further inflows.”
“The rise in forward premium is also deterring importers to hedge their currency exposure while also impacting stable inflows into the bond market.”
Market implications
USD/INR trades close to the 11-month lows of 72.66 reached Thursday, although the bulls are attempting a recovery, as the US dollar rebounds amid tepid market mood.
The cross was last seen trading at 72.77, up 0.10% on the day.
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