Central bank to intervene in currency futures market.
As market participants gear up for the U.S. Federal Reserve’s meeting next week, when it is expected to take a decision on raising interest rates for the first time in more than a decade, the Indian central bank is keeping all its powder dry to combat any volatility in the financial markets here.
In a rare admission on Wednesday, the Reserve Bank of India (RBI) said it had decided to intervene in the Exchange Traded Currency Derivatives (ETCD) segment, without specifying if it had already been active in that market.
The central bank generally intervenes in the spot currency market, and manages the rupee flows resulting from that intervention through the forwards market.
“RBI intervenes in the domestic foreign exchange market as and when required in order to manage excessive volatility and to maintain orderly conditions in the market,” the central bank said on Wednesday.
“As a further measure it has been decided to intervene in the ETCD segment, if required,” it said. The data on the intervention would be made public, like in the case of spot market intervention which comes with a lag, the central bank said.
Three exchanges — National Stock Exchange, BSE and Metropolitan Stock Exchange of India — offer paired derivative contracts of rupee-dollar, rupee-yen, rupee-pound and rupee-euro.
However, dealers said the central bank had already started intervening in the futures market, maybe since a fortnight. “It will increase the depth of the market,” said a dealer from a public sector bank.
Markets are on the edge ahead of the U.S. Fed meet and the move by the central bank is seen as another tool to curb volatility in the currency markets.
The Indian currency has been under pressure amid foreign fund outflows and has depreciated almost 7 per cent against the dollar in the current financial year. In November, the rupee almost touched a two-year low, and weakened 2.1 per cent, making it the worst performing currency in Asia. Dealers said the central bank has been intervening in the spot market to curb volatility. RBI always maintains that it does not target any specific level for the currency and intervenes only to curb volatility.
Market participants, however, do not see a 2013 like situation, when the rupee tumbled to a historic low of 68.25 a dollar on August 28. Since then, following a series of steps by the central bank and the government, including restrictions on the import of non-essential items and efforts to attract foreign fund flows, the currency had stabilised. The central bank has built up its foreign exchange reserves — adding more than $75 billion in two years. The twin deficits – fiscal and current account – have also improved since 2013.
