Central bank buys dollars to check sharp appreciation of rupee

The country’s foreign exchange reserves crossed the $450-billion mark for the first time ever on the back of strong inflows which enabled the central bank to buy dollars from the market, thus checking any sharp appreciation of the rupee.

“India’s foreign exchange reserves were at $451.7 billion on December 3, 2019 — an increase of $38.8 billion over end-March 2019,” RBI Governor Shaktikanta Das said at the post monetary policy press conference.

At $451.7 billion, the country’s import cover is now over 11 months.

The rise in foreign exchange reserves will give the central bank the firepower to act against any sharp depreciation of the rupee, currency analysts said.

The Reserve Bank has always maintained that it intervenes in the foreign exchange market to curb volatility and does not target a particular level of exchange rate.

Foreign investment

Net foreign direct investment rose to $20.9 billion in the first half of 2019-20 from $17 billion a year ago while net foreign portfolio investment was $8.8 billion in April-November 2019 as against net outflows of $14.9 billion in the same period last year. “Net investment by FPIs under the voluntary retention route has amounted to $6.3 billion since March 11, 2019,” Mr. Das said.

During the taper tantrums of 2013, (or the collective reactionary panic after the U.S. Federal Reserve said it would apply the brakes on its Quantitative Easing programme), India’s foreign exchange reserves fell to $274.8 billion in September of 2013, prompting the Centre and RBI to unleash measures to attract inflows. It has been a steady rise for the reserves since then, with $175 billion added in the last six years.