The rupee’s sharp depreciation against the dollar may be grabbing the headlines, but the Reserve Bank of India (RBI)’s scaled down intervention in the foreign exchange markets over the last year is also worth noting.

Gross intervention by the RBI in the forex market — purchase and sale of dollars — is down sharply from $81 billion in 2007-08 and $88 billion in 2008-09 to $29.8 billion in 2012-13.

Inadequate reserves

The central bank has had to reduce its intervention due to the inadequacy of its foreign currency reserves, which are currently at around $287 billion.

This is lower than the reserves of $309 billion recorded in March 2008.

In 2007-08, when the rupee hit a high of 39 against the greenback, the RBI had purchased $78 billion (net) in the foreign currency market.

The bid then was to weaken the rupee.

In 2008-09, when the domestic currency was in free fall following the global economic crisis, RBI had sold $35 billion (net) to bolster it.

In contrast, net sales in 2012-13 were limited to $2.6 billion.

This was despite the rupee threatening to breach the 57.30-mark this year.

With the increasing value of gold and crude imports, India’s forex reserves can currently service only six and half months of imports.

In March 2008, the forex reserves could service 13 months of imports.

The adequacy of reserves to service external debt is not too comfortable either.

SPOT & forward

Foreign exchange reserves amounted to 138 per cent of external debt in 2007-08, according to the RBI.

This ratio was down to 82.9 per cent by June last year.

The RBI, however, has been relying on both spot market and forward market intervention to stem the sliding rupee.

There has been a sharp increase in the central bank’s activity in the rupee forwards market since last May.

Open interest

The average value of outstanding contracts (open interest) at the end of each month was $13.2 billion from May 2012 to April this year.

This is a more-than-four-fold increase from the open interest recorded in 2011.

The RBI could be using forex derivatives to influence spot prices.

Also, this kind of intervention does not impact liquidity in the economy.

Control volatility

The central bank has also used other means to control rupee volatility over the past year, such as imposing checks on trading in the inter-bank foreign exchange market, attempting to halt speculative activity by companies by putting limits on the sums parked in the Exchange Earner’s Foreign Currency Account and so on.

In the bout of volatility witnessed this month, curbs were placed on gold imports as an indirect means to check dollar demand from importers.

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