A rise in global crude oil prices usually brings with it a host of problems for the Reserve Bank of India (RBI). The outlook for domestic inflation worsens because of imported inflation and the current account deficit also widens given the increase in the oil import bill. Ergo, the central bank is loath to see rising oil prices and it should be.
However, there is an unlikely benefit from rising crude oil prices in the present context.
So far, the central bank has been battling the flood of foreign investment inflows into India, especially when the current account is in an unwelcome surplus. Since the economy’s capacity to absorb dollars is limited, the RBI has incessantly mopped them up through its interventions in the foreign exchange (forex) market.
Between April 2020 and January this year, the central bank has absorbed $72 billion through interventions. In July and October, the RBI mopped up more than $15 billion in a single month.
The central bank’s interventions resulted in a 3.7% depreciation of the rupee so far in FY21.
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However, interventions have slowed down of late. In December, the central bank’s dollar purchases were $3.9 billion. In January and February, too, the intervention has not been much, according to dealers. The RBI shares its forex intervention details with a lag of two months.
One of the reasons that the central bank may have slowed down its intervention could be the narrowing of the current account surplus.
“India’s balance of payments flow dynamics, especially the widening goods-trade deficit, indicate that there is room for less-intense intervention," wrote analysts at Barclays Securities India Pvt. Ltd in a note.
The central bank had increased dollar purchases in the forward market in December.
The current account surplus narrowed to $15.5 billion for the second quarter of FY21 from $19 billion for the June quarter. Analysts expect the current account to show a small surplus for the whole of FY21.
The widening of the trade deficit in recent months shows that the current account surplus is on its way down. This has been driven by the sharp rise in commodity prices, including crude, globally. A smaller surplus would mean there is less excess dollars for the RBI to absorb.
Another offshoot of crude price rise has been the wariness creeping into markets. Commodity prices are an early sign of inflation and so equity investors have turned wary of emerging markets, which may slow down the flow of dollars. The upshot of this is that the central bank may not need to keep intervening to mop up dollars.
Further, several factors need to be kept track of to see whether the RBI’s forex policy would change. The inflation target is up for review this month and the RBI’s monetary policy committee will meet in April to decide on interest rates and policy stance.
A change in view on interest rates would have implications for the forex policy as well.
https://www.livemint.com/market/mark-to-market/rising-crude-brings-an-unlikely-relief-to-rbi-on-forex-intervention-11615140347555.html
2021-03-07 18:44:49Z
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