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Informist, Monday, Jan. 27, 2025

 

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--Sources: Economists, mkts requested RBI to release NDF intervention data
--Sources: Economists suggested RBI to lower repo rate in Feb
--Sources: Economists suggested RBI to ease liquidity before cutting rates
--Sources: Economists suggested CRR cut, OMO buys to ease liquidity strain

 

By Shubham Rana and Pratiksha

 

NEW DELHI - Pitching for greater transparency in the Reserve Bank of India's foreign exchange operations, economists and market participants have asked the central bank to make public the extent of its intervention in the offshore non-deliverable forwards market, according to people who were part of recent meetings with RBI top brass.

 

"Some people have asked for data on NDF intervention (from the RBI) to know what is happening in that market and how much the RBI is intervening there," a person who was part of one such meeting told Informist. The RBI intervenes in the spot, forwards, and the offshore NDF market to defend the currency from sharp swings against the dollar. 

 

RBI Governor Sanjay Malhotra met economists last week in Delhi and Mumbai, where some economists suggested, among other things, making the NDF intervention data publicly available. "The RBI asked economists whether they would want the NDF data to be made publicly available," an economist who attended this meeting said. "RBI officials said that they had received requests (from economists and market participants) to make this data public," added the economist.  

 

The RBI releases data on its outstanding forward dollar sales with a lag of one month, but combines the numbers for NDF and onshore forward positions. The extent of its intervention in the offshore NDF market specifically is not known. The central bank also releases the data on its intervention in the currency spot and futures markets with a delay of over one month.

 

Having segment-wise details of the RBI's operations in the forwards market will not only enable a more informed assessment of market conditions but also provide a more accurate picture of the central bank's foreign exchange reserves, net of deliverables, experts said. While contracts in the onshore forwards market are settled by delivery of currencies, NDF trades are cash-settled.

 

According to the latest data, the RBI's net outstanding sales of dollar/rupee forward contracts climbed to a new high of $58.85 billion at the end of November, $9.67 billion higher from a month ago. While this amounted to around 9% of the foreign exchange reserves at the time, most of the RBI's outstanding forward sales were likely in the NDF segment and therefore, do not represent any liability on its reserves.

 

Since October, the RBI was said to be actively intervening in the overseas NDF market to defend the rupee, which was hitting record lows against the dollar. Informist had reported in November that the scale of RBI's intervention in the offshore NDF was much higher than its local dollar sales, and its outstanding NDF sales had climbed as high as $60 billion-$70 billion during the month. 

 

POLICY RECOMMENDATIONS

Economists asked the central bank to lower the repo rate in February to support growth, which is estimated to fall to a four-year low of 6.4% in 2024-25 (Apr-Mar). While most economists were in favour of a repo rate cut from the current 6.50%, they said that the central bank must ease the current liquidity strain in order to make the transmission of any rate cut effective. 

 

Some of the liquidity measures suggested in the meeting included purchases of government bonds via open market operations, another cut in the cash reserve ratio, and more of dollar/rupee buy-sell swaps. The RBI, had in December, lowered banks' cash reserve ratio by 50 bps to 4.00% of net, demand and time liabilities in two equal tranches. The then RBI governor Shaktikanta Das had cited the CRR cut as a precautionary measure for liquidity in view of expected tax outflows and increased currency in circulation.

 

Economists also asked the RBI to allow the rupee to fall against the dollar in line with market movements. "It was said that rupee falling was not a big risk since much of the dollar strength was behind us," another economist said.

 

The rupee has seen sharp depreciation against the dollar in recent months with the RBI seen adopting a shift in its intervention strategy and loosening its clutch on the currency. The rupee has declined nearly 1% in January so far as against a 2.9?preciation in entire 2024.  End

 

US$1 = INR 86.42

 

Edited by Vandana Hingorani

 

 

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