The Reserve Bank of India (RBI) sold a record $20.63 billion foreign currency during October to check the steep depreciation of the rupee.
With net sales estimated at $18.67 billion in the month, the cumulative sales of foreign currency between April and October 2008 was of the order of $28.32 billion, according to latest data released by RBI.
In rupee terms, on a net basis, RBI sold foreign currency worth nearly Rs 93,000 crore during October and sucked out liquidity from the system.
Liquidity had tightened considerably at the beginning of October after the credit crisis intensified in the US. In India, the payment of the second installment of advance tax and heavy borrowings by oil firms had also drained cash from the system. RBI’s net sales of foreign currency worth $3.78 billion or Rs 18,396 crore in September only intensified the crunch, market players have said.
Due to heavy selling by foreign institutional investors and appreciation of the US dollar against most currencies, RBI has had to repeatedly intervene in the market to support the depreciating rupee. This has also resulted in the foreign exchange reserves depleting nearly $64 billion since April. Since the end of December, 2007, foreign exchange reserves have fallen $27.7 billion to $245.86 billion on December 5, this year.
| DOLLAR DEALING Month-wise sale/purchase of dollar by RBI | ||||
| Month 2008-09 | Foreign currency ($mn) | Contract | ||
| Purchase (+) | Sale (-) | Net (+/-) | Rate (Rs cr)* | |
| April | 4,325 | - | (+) 4,325 | (+) 17,237.89 |
| May | 1,625 | 1,477 | (+) 148 | (+) 118.51 |
| June | 1,770 | 6,999 | (-) 5,229 | (-) 22,970.78 |
| July | 3,580 | 9,900 | (-) 6,320 | (-) 27,829.05 |
| August | 3,770 | 2,560 | (+) 1,210 | (+) 4,557.53 |
| September | 2,695 | 6,479 | (-) 3,784 | (-) 18,396.49 |
| October | 1,960 | 20,626 | (-) 18,666 | (-) 92,925.06 |
| (+) Implies purchase including purchase leg under swaps and outright forwards (-) Implies sales including sale leg under swaps and outright forwards * At Rs equivalent Source: RBI Monthly Bulletin December 2008 | ||||
Despite RBI’s intervention, in October, the rupee fell around 5 per cent against the dollar. Since April, the rupee has fallen 21.61 per cent against the greenback to close at 48.58. So, far in 2008, it has depreciated over 23 per cent against the dollar, with only the South Korean won and the Pakistani rupee depreciating more among the Asian currencies.
The depreciation of the rupee against the dollar is also reflecting in the six-currency real effective exchange rate (using the 1993-94 base) which was estimated at 100.74 on November 21, 2008, compared with 113.90 in November 2007. At 100.74, REER is at its lowest level since 2003-04, when it was at 99.17. A fall in the REER indicates depreciation. It was estimated at 114.23 in January 2008 and 112.16 in April this year.
REER is the weighted average of nominal exchange rate, adjusted against inflation differential against domestic and foreign countries. In the basket of six currencies, the Euro has the maximum weight (35.12), followed by the US dollar (28.19). The Japanese Yen, UK Pound, Hong Kong dollar and Renminbi Yuan are also part of the basket.
