RBI turns net seller of dollars after a year

The Reserve Bank of India stepped in to support the rupee back in August, when the domestic unit along with regional counterparts depreciated in wake of CNY devaluation. The central bank sold USD 1.6bn in August, turning a net seller of dollars after nearly a year. 

Before the yuan shake-up, the rupee was largely range-bound within 62-64/US dollar since the start of this year. This had seen the authorities on the other side of trade, preventing excessive appreciation in the currency by absorbing inflows and building the foreign reserves stock. 

Post-yuan fall, the rupee broke past the range to weaken beyond 66/US dollar in Aug and Sep. There is a likelihood that the central bank continued to intervene in Sept, after turning a net seller of dollars in Aug. Notably, the authorities have been keen to contain volatility and smoothen rupee's fall rather than reverse the downtrend. 

This defence also saw foreign reserves stock fall by USD 4bn by mid-Sep, from a peak of USD 356bn back in June. However, this modest fall is hardly a dent in the reserves' war chest given the USD 76bn increase in the past two years. Since the taper tantrums in Aug/Sep13, authorities have been focused on building sufficient buffer against potential outflows and external headwinds. 

In the past week, fading external risks and bunched-up rate cut stoked a relief rally in the Indian financial markets, with the rupee in particular heading to two-month highs. While it is far from certain whether this bout of stability will sustain, the authorities are likely to return to limit rupee's relative appreciation, in order to preserve trade competitiveness, build foreign reserves and keep it in sync with other regional action. 

In all, the show-of-hands is to be expected on both sides of trade, but the central bank's presence is likely to be more pronounced during bouts of currency appreciation than the other way around.