The Reserve Bank of India sold as much as $12 billion in May in the spot and forward markets together — the highest ever combined sale of dollars — as foreign fund outflows increased and trade war and interest rate hike fears threatened to drive markets lower.
The RBI sold a net $5.8 billion in spot and $6.1 billion in the forward market, latest data from the central bank shows. The combined forward and spot market sales of $11.9 billion in May is the highest ever in any month.
In July 2013 at the height of taper-tantrum, RBIs net sales in the spot market were $5.9 billion but it purchased $200 million in the forward market amidst an emerging market sell-off. Later in November 2013, it bought $10 billion in the spot market to absorb the proceed of the special dollar swap scheme, but sold $18 billion in the forward market.
The RBI was forced to increase its pace of intervention as foreign investors sale of Indian equity and debt increased in May pushing the rupee down to 70 per dollar.
“The stated stance of the Reserve Bank is that it intervenes to curb excessive volatility in the market, but not to target a level for the INR,” said Siddhartha Sanyal, chief India economist at Barclays.
While the rupee lost more than 6% to the dollar since April, the emerging market currency index fell about 3.5%. ”If currencies of other economies are also weakening, then the RBI will take a holistic view of its intervention policy,” said Sanyal.
Economists expect the RBI may have to further step up its pace of currency market intervention. "If FPI flows do not revive by the December quarter, the RBI would then have to sell $20bn to fund $65bn current account deficit," said Indranil Sengupta of Bank of America Merrill Lynch.
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