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How RBI intervened to check rupee’s plunge

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Two weeks after South Block had decided to swap high-denomination bills in the autumn of 2016, the rupee came within touching distance of the 69 mark to the dollar. On Thursday, it breached the level, reportedly requiring the central bank to enhance supplies of the worlds reserve currency to prevent the local units rout.

During the day, the rupee hit a record low of 69.09, sliding past its earlier trough of 68.86, reported on November 24, 2016. In early trading Thursday, the Reserve Bank of India (RBI) is said to have sold $400-500 million in one-month futures contracts. Later, Mint Street sold about an equal amount in the spot market, some dealers said.

The RBI could not be contacted immediately for its comments.

Such moves collectively helped the local unit erase some of its early losses. The rupee closed at 68.79 Wednesday, versus 68.63 a day earlier.

“The RBI is suspected to have sold dollars both in futures and spot markets,” said Anindya Banerjee, currency analyst at Kotak Securities. “The rupee cannot stay immune when other emerging market currencies are sliding against the dollar. But RBI intervention was sharper earlier in 2013 when Indias macro fundamentals were weak.”

Five years ago, the Indian economy was struggling to gain momentum amid a raft of domestic uncertainties.

But why did the RBI choose the futures market?

The central bank normally intervenes in the spot market to curb wild swings in the currency. However, such moves increase or reduce rupee liquidity or available cash in the banking system, distorting inflation dynamics and bond yields – factors that shape the RBIs monetary policy stance.

Over the past few months, benchmark bond yields have been rising. It pierced the psychological mark of 8%, raising overall borrowing costs. Such moves called for more open market operations (OMOs), a market matrix that helps bring down yields.

Under OMO purchases, the RBI buys bonds infusing liquidity in the system. If the central bank were to conduct more spot market interventions of selling dollars and buying rupees, such moves could affect the effectiveness of the OMO.

"The intensity toward the spot market intervention was relatively low, while the futures market makes sense for the RBI," said the treasury head at a large bank.

All other emerging market currencies, including the Chinese yuan, have lost value to the dollar with investors seeking the safety of US assets.

Rising crude prices also threaten to upset the fiscal math for countries that meet their requirements through overseas shipments.

Moreover, India tends to lose more after the US administration warned about economic sanctions on countries importing oil from Iran, a major energy supplier otherwise to New Delhi.

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