The Reserve Bank of India sold dollars heavily from its reserves in April, as it tried to cushion the fall in the Indian currency.
Data of RBI’s forex operations for the month of April shows that the central bank sold a net of $2.48 billion. This included sales of $8 billion and purchases of $5.5 billion, the data, which is released with a lag, shows.
The net sales of U.S. dollars are the highest since November 2016, shows data available on Bloomberg.
The central bank has been intervening in the foreign exchange markets to smoothen the pace at which the Indian currency is depreciating. In April, the Indian rupee fell by 2.3 percent. The fall came against the backdrop of a stronger dollar, higher crude oil prices and outflows from the domestic debt and equity markets.
In April, foreign portfolio investors sold over Rs 15,000 crore in debt and equity, shows data available on the National Securities Depository Ltd. Year to date, foreign investors have sold Rs 30,000 crore in the domestic markets. This, in turn, has weakened the Indian currency by over 5 percent so far this year, making it the second worst performer in Asia.
The RBI’s intervention in the currency markets has meant that forex reserves have slipped. The country’s forex reserves stood at $412 billion as of June 1. To be sure, reserves remain adequate and can cover over 10 months of imports, noted rating agency Moody’s Investors Service in a note on June 7.
While the RBI has intervened to contain the fall of the rupee, the recent depreciation has helped correct some of the perceived overvaluation of the currency. The 36-country trade weighted real effective exchange rate (REER) slipped to 114.67 in May 2018 compared to 119.48 a year ago. An index level above 100 suggests overvaluation.