Net sales of dollars from the Reserve Bank of India hit the highest level in nearly five years in the month of May, as the central bank tried to slow the depreciation in the Indian rupee.
The RBI sold a net of $5.76 billion in May, data released as part of the monthly bulletin shows. The data is released with a lag. The last time the RBI’s net sales of dollars was this high was in July 2013, when the rupee was plummeting towards its then all-time lows of 68.86 against the U.S. dollar.
This year the rupee has once again been weakening, albeit at a more measured pace than in 2013. The depreciation has come in response to a stronger dollar, higher oil prices and a widening current account deficit. Year to date, the Indian rupee has lost close to 7 percent and has been among the worst performing Asian currencies. Last week, the rupee hit a fresh all-time closing low of 68.94 against the dollar.
While the RBI maintains that it does not target a level for the rupee, it buys and sells dollars to stem volatility.
In May, the RBI sold $9.86 billion in the spot markets. It bought $4.1 billion, taking the net sales to $5.76 billion. In addition, the central bank also intervened in the exchange traded currency futures segment to the tune of $2.7 billion, the data showed. In April, the RBI had sold a net of $2.48 billion in the spot market and intervened to the tune of $1.89 billion in the futures segment.
As a consequence of the dollar sales, the RBI’s foreign exchange reserves have slipped to $406 billion from a peak of over $420 billion in March.
Some analysts expect the RBI’s forex reserves to dwindle further as it tries to slow depreciation in the currency.
Persistent weakness could even prompt special measures, said brokerage house CLSA in a strategy note released this week “... with the rupee becoming a political issue, the possibility of the government undertaking some form of NRI deposit scheme / dollar bond scheme cannot be ruled out ahead of elections to cap the downside in the rupee,” CLSA said.