RBI remained net purchaser of US Dollar: Why does RBI buy or sell dollars? (GS 3, Economics, The Hindu, Indian Express)

News/ Context: RBI had bought 9.169 billion dollars  and sold 8.378 billion dollars in the spot market in the month of September. As per the RBI data, published in its monthly report,  RBI remained the net  buyer of US Dollar in September 2021 as it purchased 791 million dollar on a net basis from the spot market. 

Previously in the month of August 2021,  the RBI had net purchases of 3.747 billion dollars. The central bank had purchased 10.887 billion dollars and sold 7.14 billion dollars in the spot market during the month of August 2021. While in the September month of previous year 2020, RBI  had net purchase of 8.172 to billion Dollar. 

If we look on the yearly basis then for the financial year 2020-21, RBI had net purchases of 68.315 billion dollars from the spot market. Here we can say that the forex reserve of the RBI , in terms of US currency, was increased by 68.315 billion dollars during the financial year 2020-21. It is to be noted here that the overall forex reserve of the RBI is kept in the form of Foreign currencies (basically hard currencies including US Dollar, UK Pound, Euro and Japanese Yen), Gold , SDRs and Reserve Position in the IMF. 

If we look into the value of outstanding net purchase in the forward dollar market at the end of September 2021, It was 49.606 billion US dollars, same as it was in the previous month, the data showed. 

What is forex market :  Forex market is the market where foreign currencies also known as forex or foreign exchange are being bought and sold or say traded. The forex market is the most liquid market as it is very easy to sell or buy by the foreign currency here, meaning if you want to sell your foreign currency you will get the buyer very easily. It is also  the largest market, many times greater than the global share market. Forex trading takes place whenever you buy or sell the foreign currencies.  For example if you want to travel to France you need to  convert your rupees into euros.  Here you are creating the demand for euros. How much euros you will get for your rupees, depends upon the current market value of  euros which ultimately depends upon the current demand and supply of euros in the Indian market. 

Similarly, like shares, you can buy or sell foreign currencies based on your own assumption for what you think its value is or its value will be in the future, as you do in the case of shares. You can trade  the forex (buying and selling of basically US dollars and other hard currencies) in Indian exchanges like Bombay Stock Exchange (BSE), National Stock Exchange (NSE) or Multi Commodity Stock Exchange (MCX-SX), etc. The foreign exchange market is highly liquid, decentralized and global. Commercial Banks, Brokers and Central Banks are the major participants in the foreign exchange market. Paris, London, Frankfurt, Amsterdam, Milan, New York, Toronto, Bahrain, Hong Kong, Singapore, Tokyo etc are the major commercial centres for the foreign exchange market. The RBI observes the market movement and according to its policies is obligated to intervene. 

Why RBI purchases or sells dollars in the Spot Market : When the value of US Dollar increases, the Rupee depreciates.  Depreciation of rupee can lead to  costly imports, which can ultimately lead to inflation in India and which is not favoured as per the government policies. In this case RBI sells dollars in foreign exchange market so as to lower the dollar value and to control the depreciation of rupees. Here basically RBI is increasing the supply of dollars in the forex market of India from its own forex reserve. It will result into  reduction in its own forex reserve.  

Opposite to this, when the value of US Dollar decreases, the Rupee appreciates. The appreciation of rupees reduces the international competitiveness of our product and hence our export can decrease. This is also not favoured as per our government policies. Here RBI will be buying dollars to control the appreciation of rupees. Basically here RBI is trying to increase the demand of dollars and thus the dollar price can go up. In this case RBI’s forex reserve will increase.

The overall mandate of the RBI is to stabilize the rate of Forex. Thus RBI sells and buys dollars based on the current situation. In this way RBI can be a net purchaser of US dollar in a month or net seller in another month. 

Md Layeeque Azam, Economics Faculty

Download Plutus ias daily current affairs 18 November 2021