 "Reserve Bank of India net dollar purchases in FY24 highest since FY21")
The Reserve Bank of India (RBI) recorded its highest net dollar purchase in the last three years, acquiring $41.27 billion in the financial year 2023-24. This marks the largest amount bought since the financial year 2020-21 (FY21). In FY21, the RBI had bought $68.3 billion on a net basis.
The central bank net bought $13.2 billion in March alone, marking the highest monthly net purchase since June 2021. In June 2021, the RBI had net bought $18.6 billion worth of dollars.
India’s foreign exchange reserve expanded by $68 billion over FY24. At the end of the financial year, total reserves stood at $646 billion.
Notably, the stance comes after a challenging 2022, during which the RBI net sold $25.5 billion worth of dollars. The Indian rupee experienced a 7.5 per cent depreciation against the US dollar over the financial year. However, in FY24, the Indian currency depreciated by 1.5 per cent. In the current financial year so far, the rupee has appreciated by 0.1 per cent.
The central bank absorbed a significant portion of the active inflows resulting from India’s inclusion in the JP Morgan bond index in order to contain volatility in the exchange rate.
“They bought a huge amount of dollars because inflow into the country has been very strong. The RBI has kind of held this strategy of intervening in the foreign exchange market to keep the rupee stable and curtail volatility. So keeping the rupee stable also implies not just intervening when it is under pressure and depreciating, but also during times when there are large lumpy flows that are coming in, and to prevent extreme appreciation moves as well,” said Sakshi Gupta, principal economist at HDFC Bank.
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In FY24, domestic markets witnessed record foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365 crore worth of outflows recorded in 2022-23. Of the total inflows, foreign investors injected Rs 1.2 trillion into the debt segment, marking the highest influx since 2014-15, according to data on the National Securities Depository.
“Until March, there were good inflows. And in March, the trade balance becomes lower, so we get a lot of dollar earnings. The RBI, whenever they are getting a chance to accumulate dollars, they are doing that. Also, they are ensuring that the rupee doesn't go out of line against other emerging markets,” said Madhavi Arora, lead economist, Emkay Global Financial Services.
Over the past decade, the RBI has been predominantly a net buyer of dollars in the spot market, with only two instances of being a net seller in the financial year 2018-19 and 2022-23. The central bank has asserted on several occasions that its interventions in the foreign exchange market are solely aimed at curbing volatility rather than manipulating the exchange rate.
In September 2023, JPMorgan announced the inclusion of India's bonds into the JPMorgan Government Bond Index-Emerging Markets (GBI-EM). Subsequently, on March 5 of the current year, Bloomberg Index Services revealed that Indian government bonds would be added to its Emerging Market Local Currency Government Index starting January 31, 2025.
In the calendar year 2023, the rupee displayed remarkable stability against the dollar, marking the least volatility it witnessed in nearly three decades. The currency experienced a marginal depreciation of 0.5 per cent against the greenback. The last time the Indian unit exhibited such stability was in 1994 when it appreciated by 0.4 per cent.