Why is RBI buying more dollar forwards than spot?

Mumbai: The Reserve Bank of India purchased more dollars in the forward markets than in the spot markets in August for the first time in more than six years as it sought to avoid any undue impact on rupee liquidity.The central bank’s forward market purchases in August were $10.7 billion, according to RBI data. It bought $8.5 billion in the spot market and sold $3.2 billion for net spot purchases of $5.3 billion during the month.The last time the RBI made higher forward market purchases was in May 2014, when it bought about $20 billion.The RBI had indicated in August that it preferred to use the currency to curb imported price pressures and hence continued to build foreign exchange reserves. Buying in the forward markets also helps it to manage local liquidity. India’s forex reserves are at a record $545 billion.“The policy of buying dollars in the forward markets helps the central bank in managing domestic rupee liquidity,” said Sameer Narang, chief economist at Bank of Baroda. “The central bank can choose to take delivery and release the liquidity or roll it over at a future date when the contract matures, depending on the liquidity needs then.”Absorbing liquidity generated through spot intervention comes at a cost as its needs to issue special bonds such as the market stabilisation scheme. Given the fiscal constraints due to Covid-19, such bonds may not be appropriate now.From a long-term perspective, the strategy may not have much impact on reserve management policy. “The shift in intervention strategy is unlikely to make a big difference,” said Rahul Bajoria, chief India economist at Barclays.

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