rbi: More dollar sales likely, accretion to forex reserves may be slow

The Reserve Bank of India’s project to shore up foreign currency reserves would be hampered by as foreign portfolio investors offload their investments in the Indian capital markets in the hunt of better returns from US bonds, pushing the central bank to sell dollars to ease currency volatility, experts said.

Excluding the $1.9 billion lumpy investment by American investment firm GQG Partners into four Adani group stocks, overseas investors remained net sellers in the first week of March, in continuation of the selling trend seen in February.

If the offloading by overseas investors continues, the central bank may sell more dollars to smoothen the movement of the Indian currency.

FIIs are likely to sell at higher levels since the US 10-year bond yield is at 4% and this is attractive, risk-free investment for them, said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

“In the near-term, rebuilding foreign reserves is likely to face two steps forward one step back moves, justifying the central bank’s proactive stance on rebuilding its buffer,” said Radhika Rao, senior economist at DBS Bank.

The all-time high for India’s forex stockpile was at 642.453 billion on September 3, 2021.

The RBI sold a massive $120 billion from its coffers between September 2021 and October 2022 to smoothen the local currency’s depreciation. The reserves were somewhat replenished in November and December 2022 with net dollar purchases by RBI, but the stepped up dollar sales pushed reserves down by $13.7 billion since late January.The reserves were at $560.942 at the end of February 24, according to the latest available data.

“The RBI is expected to have switched to dollar sales in February to defend one-sided weakness in the rupee and keep intraday volatility in check,” Rao said, adding that the dollar sales from coffers had prevented the rupee from decisively breaking above 83 against the greenback last week.

Excluding the inflows into Adani group stocks, FPIs continued to be net sellers to the tune of Rs 6544 crores in the first four days of March, and they sold equity to the tune of Rs 41169 crore (net) in 2023.

Currency market experts said the rupee may remain between 81.70 and 82.50 for the rest of the month, before coming under more pressure in the first quarter of the coming financial year as more outflows are expected from the emerging markets to US bonds with the continuing hardening of US policy rates.

“The extent of outflows would depend on the minutes of the FOMC meeting, said KN Dey, a veteran forex market consultant.
“Back home, a strong currency may not be good for an economy with widening current account deficit,” Dey said.