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The Reason behind RBI Buying Dollars Aggressively

The Reason behind RBI Buying Dollars Aggressively

Despite a $14 billion outflow from domestic equity and debt markets, the Foreign Exchange Reserves have risen by a $50 billion mark.

Recently, RBI’s Foreign Exchange (FX) reserves crossed half a trillion-dollar mark. In spite of a $14 billion outflow from domestic equity and debt markets since the beginning of the year, the FX reserves have risen by $50 billion.

The week ending on 12th June saw the FX reserves rising for the seven successive weeks.

Impact on the relative performance of rupee: The rupee is the worst-performing Asian currency currently.

Risk aversion and flight towards safety had pumped all the Asian currencies and the rupee was the worst performer.

With the improvement in global risk sentiment in the last one month, all the currencies have recouped their losses, the rupee is yet to.

The RBI is using bouts of overall global dollar weakness to absorb inflows to prevent the rupee from appreciating. Real Effective Exchange Rate reflects this.

The overvaluation of the currency in relative terms has corrected approximately 3% since the year’s beginning. RBI has also intervened to prevent runaway depreciation of the rupee.

The surplus liquidity in the banking sector is around Rs. 6 lakh crores. Monetary policy transmission has been helped by this besides keeping the operating rate closer to the Reverse repo rate.

The economic capital framework is one of the theories behind the aggressive reserve build-up. The theory postulates that the central bank would help the government sail through the financial stress due to the COVID-19 with the help of its balance sheet.

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