Reason for the rise in currency holdings despite the sale of dollars

India’s currency stack unexpectedly soared by $634 million in a week, which may have required significant central bank intervention to halt the rupee’s slide, highlighting the role that contracts prior futures may have contributed to the increase in foreign exchange reserves.

For the week ended in March. 4, he may have taken deliveries of past futures/futures instead of rolling them over, dealers said.

In a truncated week between Feb. 28 and March 4, the rupiah hovered up 1.55% to an intraday low of 76.45 from an intraday high of 75.28 on the dollar, the invasion Ukraine that caused an asset price spike. The Reserve Bank of India (RBI) is estimated to have sold $2 billion to $4 billion to halt further local unit impairments during the week.

“The optical figures appearing in the latest foreign exchange reserves are not necessarily indicative of the amount of central bank intervention,” said Ashhish Vaidya, Managing Director of DBS India. “The RBI may have taken deliveries of expiring futures contracts.”

During the week, foreign currency assets rose to $565.46 billion from $564.8 billion the previous week, according to RBI data. While the majority of them are dollar-backed assets, the rest are non-dollar-denominated assets. During the same period, the dollar index, which measures unity against other major currencies, increased by 2%.

India’s overall foreign exchange reserves increased by $394 million to around $632 billion.

“It is difficult to assess the sum of expiring futures contracts where the RBI has likely taken deliveries,” said Anindya Banerjee, currency analyst at Kotak Securities. “This decision likely halted the rise in the futures premium, which would have increased had these futures contracts been rolled over.”

The Reserve Bank generally rolls forward contracts when it makes put/call swaps. Selling dollars on the spot and buying them in futures helps the futures premium increase.

“It could be a double whammy for importers at a time when the rupee is depreciating,” Banerjee said.

In the latest RBI monthly bulletin, open futures contracts between one and three months stood at $1.20 billion as of December 31, 2021.

When the RBI takes deliveries, the same amount of dollars is added to the foreign currency assets.

“To get a full picture of the RBI’s intervention, we will also have to wait for the RBI’s open futures data,” said Ananth Narayan, associate professor at SP Jain Institute of Management and Research.

“It is possible that the RBI took delivery of some of its dollar forward purchase contracts at the end of February,” he said.

It should be noted here that the RBI executed two-year put/purchase swaps for $5 billion on March 8, and the sell leg of the $5 billion 3-year buy/sell FX swap completed in March 2019 expires at the end of this month.

The rupee was a bit higher against the dollar on Monday, closing at 76.57, Bloomberg data shows.