{"id":34069,"date":"2018-10-30T15:42:35","date_gmt":"2018-10-30T10:12:35","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=34069"},"modified":"2018-10-30T15:42:35","modified_gmt":"2018-10-30T10:12:35","slug":"rbi-remains-net-buyer-of-greenback-in-september-snaps-up-1-3-billion","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbi-remains-net-buyer-of-greenback-in-september-snaps-up-1-3-billion\/","title":{"rendered":"RBI remains net buyer of greenback in September, snaps up $1.3 billion"},"content":{"rendered":"<p><strong><a href=\"http:\/\/www.thehindu.com\/business\/Economy\/rbi-remains-net-buyer-of-greenback-in-september-snaps-up-13-billion\/article20305123.ece\">RBI remains net buyer of greenback in September, snaps up $1.3 billion<\/a><\/strong><\/p>\n<p><b>Context<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Reserve Bank of India (RBI) continues to remain the net purchaser of the U.S. currency after it bought $1.259 billion in September from the spot market.<\/span><\/li>\n<\/ul>\n<p><b>The exchange business<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In September, RBI bought $3.788 billion, while it sold $2.529 billion in the spot market.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In August too, the central bank was net purchaser of 3.226 billion of the greenback, buying $4.556 billion and selling $1.330 billion in the spot market.<\/span><\/li>\n<\/ul>\n<p><b>Why does RBI intervene in the foreign market?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The RBI intervenes in the foreign market to <\/span><b>contain volatility in the rupee and not set a price band.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In FY17, RBI had a net purchase of 12.351 billion of the U.S. currency as it bought $71.764 billion and sold $59.413 billion in the spot market.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The RBI has been intervening in the currency markets because a weaker currency pushes up the country\u2019s import bill \u2013 you pay more rupees for the same amount of dollars \u2013 and contributes to the current account deficit.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It is also indicative of a country\u2019s economic health and a weaker currency is a signal to investors that the economy is not being well-managed.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India has a huge import bill largely because it buys almost 80 per cent of its oil from abroad, and a weak rupee can wreak havoc with the government\u2019s finances.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Market decides the value of the rupee and the central bank only intervene to halt volatile currency movements caused by speculative trades.<\/span><\/li>\n<\/ul>\n<p><b>What are dollar sales?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The RBI has been intervening in the forex market since December 2011, when the rupee hit a record low, to stabilize the currency.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Over the past couple of weeks, it has stepped up its dollar sales to stem the rupee\u2019s slide.<\/span><\/li>\n<\/ul>\n<p><b>What is the impact of the intervention?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The reason that the rupee has continued to fall is because the RBI is caught in a cycle where it has to battle inflation, liquidity crunch and a falling rupee at the same time.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Unfortunately, any action it takes to tackle one could be negated by the others. To tackle inflation, the RBI must keep rates high and liquidity tight, but that can stifle economic growth and push the currency down.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If it sells dollars to support the currency, that too sucks liquidity out, choking growth. Slower growth makes India an unattractive destination for foreign investors, which in turn leads to drying up of dollar flow.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">But if it releases too much liquidity into the system, inflation could go into double digits and push the value of the rupee down, completing the vicious cycle.<\/span><\/li>\n<\/ul>\n<p><b>Nature of Foreign Exchange Market:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The foreign exchange market is the place where money denominated in one currency is bought and sold with money denominated in another currency.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It provides the physical and institutional structure through which the currency of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The primary purpose of this market is to permit transfer of purchasing power denominated in one currency to another.<\/span><\/li>\n<\/ul>\n<p><b>RBI as a custodian of India\u2019s foreign exchange reserves<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The RBI acts as the custodian of the country\u2019s foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India\u2019s membership of the IMF.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Exchange control was first imposed in India in September 1939 at the outbreak of World War II and has been continued since. Under it, control was imposed on both the receipts and payments of foreign exchange.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The foreign exchange regulations under the law required that all foreign exchange receipts whether on account of export earnings, investment earnings, or capital receipts, whether oh private account or on government account, must be sold to the RBI either directly or through authorized dealers (mostly major commercial banks).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This resulted in centralization of country\u2019s foreign exchange reserves with the RBI and facilitated planned utilization of these reserves, because all payments in foreign exchange were also controlled by the authorities.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The exchange control was so operated as to restrict the demand for foreign exchange within the limits of the available supplies of it.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Foreign exchange was rationed among competing demands for it according to the government policy.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">All this became essential in the context of actual or potential shortage of foreign exchange, which had been an important constraint on India\u2019s efforts at planned economic development, most of the time.<\/span><\/li>\n<\/ul>\n<p><b>The Reserve Bank of India:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The RBI is entrusted with monetary stability, the management of currency and the supervision of the banking as well as the payments system.<\/span><\/li>\n<\/ul>\n<p><b>RBI manages the foreign exchange operations through two departments, namely:<\/b><\/p>\n<ol>\n<li><span style=\"font-weight: 400;\"> Department of External Investments and Operations, and<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Foreign Exchange Department.<\/span><\/li>\n<\/ol>\n<p><b>Department of External Investments and Operations:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The main activities of the department are management of exchange rate of the Indian rupee, and management and investment of foreign exchange reserves of RBI.<\/span><\/li>\n<\/ul>\n<p><b>Foreign exchange department:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">With the introduction of the Foreign Exchange Management Act, 1999 (FEMA) with effect from June 1,2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to \u201cfacilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India.\u201d<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>RBI remains net buyer of greenback in September, snaps up $1.3 billion Context The Reserve Bank of India (RBI) continues to remain the net purchaser of the U.S. currency after it bought $1.259 billion in September from the spot market. The exchange business In September, RBI bought $3.788 billion, while it sold $2.529 billion in&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/rbi-remains-net-buyer-of-greenback-in-september-snaps-up-1-3-billion\/\">Continue reading <span class=\"screen-reader-text\">RBI remains net buyer of greenback in September, snaps up $1.3 billion<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-34069","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704931851},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34069","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=34069"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34069\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=34069"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=34069"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=34069"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}