The Reserve Bank of India (RBI) has changed its intervention strategy in the foreign exchange market for meeting the dollar requirements of state-run oil marketing companies, as well as for building up its reserves.
According to currency dealers, a few months ago, five to seven state-run nationalised banks used to intervene in the market on a day-to-day basis. Now, a couple of banks intervene, that too, at a level set by RBI. The same strategy is followed when it comes to selling dollars.
“Earlier, five to seven nationalised banks used to buy in the foreign exchange market on behalf of RBI for the state-run oil marketing companies. So, there used to be a sudden sporadic demand in the market. Now, RBI has asked oil companies to buy their requirements with a bank at a time, that too, at a certain level. Due to this, there is no sporadic demand. If a level is given to, say, seven banks, there is a risk because before that level is reached, the banks may start buying. However, over here that is not the case,” said a currency dealer with a state-run bank who did not wish to be named.
THE RIGHT MOVE
The volatility in the rupee has reduced substantially since September after Raghuram Rajan took over as the Reserve Bank governor
The changed strategy has benefited the foreign exchange market
Currency experts believe this strategy may be continued by the central bank
The volatility in the rupee has reduced substantially since September after Raghuram Rajan took over as RBI governor. He introduced various steps due to which volatility was reduced, though at times the rupee is still vulnerable.
“State-run banks follow the same strategy even for building foreign exchange reserves. On any day, there are only about two state-run banks that are given the mandate to intervene on behalf of RBI. Banks keep intervening on rotation,” said a currency dealer with a private bank who did not wish to be named.
This changed strategy has benefited the foreign exchange market. “It is easier for RBI to manage one or two banks intervening in the market, rather than five or six banks. Besides, it also helps limit volatility in the market,” said the head of treasury at a public sector bank who did not wish to be named.
Currency experts believe this strategy may be continued by the central bank. They are also of the view that RBI has a level for the rupee and a daily trading range with which it is comfortable. A strategy like this helps achieve these objectives.
The rupee ended at Rs 59.74 on Thursday, against the previous close of Rs 59.69 per dollar. RBI’s foreign exchange reserves rose by $1.39 billion to $314.92 billion in the week ended June 20.