RBI has spent half of $140 bn FX capital to defend rupee, bankers estimate

India has used up about half of the more than $140 billion it mobilised through special measures to bolster its foreign exchange war chest earlier ​this year, highlighting pressure on the rupee and the central bank's determination ​to turn the tide.

The Reserve Bank of India's spot market dollar sales to support the local ‌currency, alongside dollar-rupee sell/buy swaps aimed at absorbing surplus rupee liquidity in the banking system, are behind the drawdown, economists and FX traders across six banks said.

Pressure on the rupee from high oil prices, a recent surge in US Treasury yields and ongoing foreign equity outflows has compelled the RBI to step up intervention against local currency weakness, in order to limit knock-on risks to inflation and broader financial stability.

The RBI has deployed around $75 billion to $80 billion through spot dollar sales and dollar-rupee swaps since its special measures to attract foreign-currency inflows came into effect on June 8, three economists estimate.

Economists derived their estimates by adjusting weekly changes in India's foreign-exchange reserves, published by the RBI every ‌Friday, to exclude revaluation effects.

India's foreign-exchange reserves fell to $734.6 billion through October 2, down about $51 billion from their peak in the first week of September.

"The sharp fall in usable reserves, after adjusting for forward shorts and gold, has reached noticeable levels. A continued fall could raise doubts about the RBI's ability to defend the rupee and fuel more speculation," analysts at Ambit, a brokerage, said in a note.

At the end of September, the RBI's net forward dollar liabilities stood at about $200 billion while the value of its gold holdings ​was at $106.4 billion through October 2.

The economists' estimates for the size of intervention are in line with those of ‌traders at banks that handle spot and swap transactions. Their calculations draw on discussions with other bankers and FX brokers and proprietary models developed using various market parameters.

The Reserve Bank of India ​did not immediately ‌respond to a request for comment.

Battle to stabilise

Last weekend, the RBI introduced measures aimed at directly curbing dollar demand ‌in the market. It opened a special window for oil companies to buy dollars directly from the central bank, drawing their demand away from the open market.

It also imposed cash margin requirements on certain ‌forward ​dollar purchases, making ​it more expensive for importers to hedge their currency exposure, with higher costs aimed at discouraging dollar buying.

"Over the last six months, the RBI has repeatedly stepped in with major measures ‌whenever the exchange rate ​approached the 97/USD mark, signalling this level as the RBI's implicit tolerance threshold," Ambit said.