RBI’s March forex buys hit 5-year high to boost banking liquidity

The RBI conducted three dollar-rupee buy-sell swaps totalling up to $25 billion between January and March. In such a swap, the RBI buys dollars in exchange for rupees, thereby infusing local-currency liquidity into the system.

Of the three auctions, two auctions amounting to $10bn each were settled in March.

The central bank bought $14.4 billion on a net basis in the forex market in March, compared with net sales of $1.6 billion in the preceding month, data published late Wednesday in the RBI’s monthly bulletin showed. This is the largest net purchase since June 2021.

The RBI purchased $41.5 billion and sold $27.2 billion in March, a month when the Indian rupee gained 2.3% against the dollar.

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The net outstanding forward sale stood at $84.4 billion as at the end of March, compared with a net sale of $88.7 billion in February, the RBI data showed. The RBI’s forward book indicates the buildup of net dollar shorts, which will need to be rolled over or neutralised with liquidity infusion. Otherwise, this will drain banking system liquidity, according to economists.“The net number for March would have been negative (net sale) if the RBI had not conducted a buy-sell swap worth $20bn,” said Gaura Sen Gupta, chief economist, IDFC First Bank.“The RBI’s intervention in the foreign exchange market has implications on the banking system liquidity. Keeping in mind that the central bank is focused on transmission of rate cuts, we don’t expect meaningful reduction in the forward book, although there could be small reductions, depending on the capital inflows,” she added.

When short positions mature, the RBI will have to sell dollars in exchange for rupee, impacting INR liquidity. The selling of dollars will also impact RBI’s foreign exchange reserves, which are currently at $691 billion, down from a peak of $704.9 billion late September last year.