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RBI’s foreign exchange measures to protect the rupee push billing rates to a 3-year high

By on July 28, 2022 0

The Reserve Bank of India‘s (RBI) intervention in the foreign exchange market to protect the Indian rupee appears to be pushing shorter rates to multi-year highs. In recent weeks, the rupiah has hit a series of record lows and even breached the 80 mark against the US dollar.

Kanika Pasricha, an economist at Standard Chartered Plc in Mumbai, said persistent foreign exchange intervention to limit rupee losses and a high government cash balance could likely keep liquidity tight and rates high in the short term, according to a Bloomberg report.

The government’s borrowing costs for a three-month Treasury bill rose to their highest level in three years at an auction on Wednesday, while the weighted average call rate, an overnight interbank rate day, reached a level last seen in 2020, at 5.09%.

Further, in the report, Saugata Bhattacharya, Chief Economist at Axis Bank, said government spending has failed to materialize with New Delhi’s cash balances with RBI estimated at Rs 4 trillion, which contributes also to the shortage of liquidity.

According to data compiled by Bloomberg Economics, excess bank liquidity fell to 1.5 trillion rupees, its lowest level since 2019 from a 2022 high of nearly 9 trillion rupees, as fiscal outflows also weighed. This prompted the RBI to do a 3 day repo auction to inject 500 billion on Tuesday.

Pasricha said inflation will remain the top priority for the RBI with a rate hike of 50 basis points likely next week.

On Thursday, in the interbank foreign exchange market, the Indian rupee closed at 79.70 (provisional) against the dollar, up 21 paise.

RBI data showed that India’s foreign exchange reserves fell further by $7.541 billion to $572.712 billion in the week ending July 15. Foreign currency assets stood at $511.562 billion, while gold reserves were at $38.356 billion and SDRs at $17.857 billion.

RBI Governor Shaktikanta Das told a conference last week that the impact of the crushing fallout on India has been relatively modest. He added that “the rupiah’s movements have been relatively smooth and orderly.” He added, “By avoiding sudden and volatile changes, we have ensured that expectations remain anchored and that the forex market operates in a stable and liquid manner.”

Currently, inflationary pressures have led to volatile market conditions, strengthening the dollar against a basket of currencies, including the rupee. To control inflation, many central banks have aggressively raised their key interest rates. The US Fed is the latest to raise its interest rate by 75 basis points, and the RBI is expected to raise rates in the next monetary policy next week.

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