RBI’s June dollar purchases hit 4-year high

Mumbai: The Reserve Bank of India‘s US dollar purchases in June was at a four-year high for any month. Economists said the central bank is building a war chest of reserves to prevent any adverse impact on the rupee amid the Covid-19 crisis.

The central bank bought $14.8 billion from the spot currency market in June, the highest since it bought $19,1 billion in November 2016. In addition, RBI bought $2.5 billion in the forward market in June to contain the rupee liquidity impact of dollar purchases, latest data from the central bank show.

Economists said RBI is accumulating a war chest in the uncertain times caused by the pandemic that could accentuate economic crisis both at home and abroad.

“We estimate that the RBI can sell $50 billion to defend INR in case of a speculative attack,” said Indranil Sengupta, chief India economist at BofA Securities.

The Reserve Bank has been accumulating reserves since the pandemic spread since March. The reserves are at $534 billion as of end July.

The central bank also sold $5 billion during June to meet the market’s dollar demand from time to time, resulting in a net spot purchase of $9.8 billion, the RBI data indicated.

From the monetary policy perspective, dollar purchases by a central bank adds to domestic currency liquidity, which in turn helps in the central bank’s accommodative stance to support growth at times of a slowdown.

RBI may continue to buy dollars even as it has a stock over half a trillion dollars, experts said.

“Higher FX reserves will likely comfort foreign investors into stepping up FX inflows, a la 2004-08,” Sengupta said. “Second, they are India’s only defence against contagion risks with G-3 central banks running out of ammunition.”





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