By Swati Bhat
MUMBAI (Reuters) – The Reserve Bank of India’s interventions in the foreign exchange market have helped reserves climb to a record $501.7 billion in early June, but economists say the pace of increase is likely to taper in the second half of this fiscal year.
The RBI bought a total $45 billion in the foreign exchange market in the fiscal year ended March 31, 2020, while reserves have climbed a further $25 billion since the beginning of this fiscal year.
Some of the recent surge has been driven by the RBI’s moves to mop up dollar inflows from Reliance Industries’
“Given that the money market surplus is running at a high 6.8 trillion rupees, the RBI will likely not want to inject further liquidity through FX operations,” Indranil Sen Gupta, economist with Bank of America Securities, wrote in a note.
Dollar buying intervention by the RBI pushes rupees into the banking system, which it has historically mopped up via open market bond sales.
With state and central governments scheduled to borrow a combined 19.5 trillion rupees in FY21, ICICI Securities Primary Dealership predicts the RBI will need to absorb anywhere between 3 to 6 trillion rupees worth of the supply to keep yields from spiking sharply.
“The focus of liquidity accretion may switch from FX to domestic OMOs (open market operations) in the latter part of the year,” said Sameer Narang, chief economist at Bank of Baroda.
“Thus the pace of FX reserve accretion is unlikely to be this high in H2,” he added.
With the RBI likely to be on the sidelines, some economists expect the rupee to gradually strengthen in the months ahead.
(Reporting by Swati Bhat; Editing by Alex Richardson)
