The Reserve Bank of India ramped up its FX intervention last week, selling at least $8 billion to bolster the rupee, six bankers said, as a deluge of policy-driven dollar inflows gave the central bank more room to support the currency.
The bankers estimated the RBI's market presence at between $8 billion and $15 billion, with sustained interventions helping lift the rupee to an over two-month high of 94.2850 on September 3.
The central bank's discounted hedging facility for overseas borrowings by state-run firms and banks, alongside a free-of-cost hedging facility for banks to raise overseas FX deposits have drawn in more than $136 billion.
These inflows have likely given the RBI more room to conduct sizeable interventions, one of the bankers familiar with the RBI's market interventions said, though their estimates of the scale of dollar sales varied.
This banker estimated the RBI's dollar sales last week at around $15 billion. Another banker at a state-run lender quantified it at nearly $10 billion to $11 billion for the week to September 4, at least three times the amount in the previous week.
All the bankers requested anonymity as they are not authorised to speak to the media. The RBI did not immediately respond to an email seeking comment.
The RBI's dollar-selling interventions also drain rupee liquidity from the banking system, which had recently hit a record high. Excess liquidity can push interbank borrowing costs below the policy rate, blunting monetary policy transmission.
FX war chest
Through August 21, India's FX reserves stood at an all-time peak of $740.8 billion, while J.P. Morgan said that figure has since likely risen past $750 billion.
"Increased near-term ammunition, in turn, explains the more aggressive intervention by the RBI in recent days, to try and push the rupee stronger, and bring exporters into the market," the firm said in a Friday note.
Persistent rupee weakness concerns have kept hedging flows skewed toward dollars, with importers stepping up forward purchases to guard against depreciation while exporters hold back on dollar sales, waiting for better levels, bankers said.
The rupee's rebound, from a low of 96.96 in May, is unlikely to mark the start of a broader appreciation cycle, analysts say. Goldman Sachs sees the currency in a narrow range in the medium term, saying that stronger external balances are unlikely to lead to a sustained upside.
It expects the RBI to use future inflows to pare its forward FX liabilities, which three other economists estimate have likely crossed $200 billion.