India’s central bank, the Reserve Bank of India, or RBI, decision to intervene in the Foreign Exchange (forex) market by way of forward US Dollar (USD) sales rather than on the spot could jeopardize its efforts to strengthen the Indian Rupee (INR).
The Indian Rupee was raised from 82.6825 record low to the US Dollar, thanks to the Reserve Bank of India’s interventions in the Over-The-Counter (OTC) forward market since the previous week. The RBI has been making USD sales on the spot market and engaging in buy/sell swap transactions to postpone the delivery of USD.
An agreement to acquire USD on the spot and sell them at a future rate already set is known as a buy/sell swap. The forward premium is the difference (change) between the buy and sell rates. The central bank’s buy/sell swaps have caused a sharp decline in the INR forward premiums.
The one-year implied yield of Dollar / Rupee, or the carrying charge, has decreased to an eleven-year low of just 2.45 per cent from an intraday high of nearly 3.07 per cent on the 10th of October. The decline in forward premiums lowers the cost of holding or carrying USD positions and increases importers’ demand for the currency. It is, at the moment, less expensive for importers to purchase USD for a future date for the very same level of spot.
Abhishek Goenka, the founder and Chief Executive Officer (CEO) of IFA Global, said that it seemed contradictory for the Reserve Bank of India to lower the carrying charge while attempting to safeguard the rupee.
In response to the question of why the central bank might be selling USD in the future rather than on-the-spot basis, Abhishek Goenka stated that the RBI doesn’t want the liquidity of the banking system, which is dangerously near to going into deficit, to be affected by its spot USD sales.
In regards to differing opinions on the exchange rate as well as the sufficiency of India’s foreign exchange reserves, Shaktikanta Das, governor of the Reserve Bank of India, stated in the previous month that the central bank hasn’t thought of a fixed exchange rate and only steps in to reduce extreme volatility.