The Reserve Bank of India’s plan to bolster foreign exchange reserves would be hampered by foreign portfolio investors offloading their investments to Indian capital markets in search of better yields from US bonds, prompting the central bank to sell dollars to dampen currency volatility, experts said.

Excluding the lumpy $1.9 billion investment by U.S. investment firm GQG Partners in four shares of Adani Group, overseas investors remained net sellers in the first week of March, in continuation of the selling trend observed in February.

If the shedding by foreign investors continues, the central bank could sell more dollars to soften the movement of the Indian currency.

FIIs are likely to sell at higher levels since the yield on US 10-year bonds is 4% and it is an attractive and risk-free investment for them, said VK Vijayakumar, chief strategist investments at Geojit Financial Services.

“In the short term, the replenishment of foreign exchange reserves is expected to take two steps forward, one step back, which justifies the central bank’s proactive stance on replenishing its buffer,” said Radhika Rao, senior economist at DBS. Bank.

The all-time high in India’s currency stock was 642.453 billion on September 3, 2021.

The RBI sold $120 billion from its coffers between September 2021 and October 2022 to smooth the depreciation of the local currency. Reserves were rebuilt somewhat in November and December 2022 with net dollar purchases by RBI, but intensified dollar sales have driven reserves down by $13.7 billion since late January. Reserves were at $560,942 at the end of February 24, according to the latest information available. data.

“The RBI should have switched to dollar selling in February to defend the one-sided weakness of the rupee and control intraday volatility,” Rao said, adding that the dollar selling of the vaults had prevented the rupee from breaking decisively above. above 83 against the greenback last week.

Excluding inflows into Adani Group shares, REITs continued to be net sellers of Rs 6,544 crore in the first four days of March, and they sold shares of Rs 41,169 crore (net) in 2023.

Foreign exchange experts said the rupiah could remain between 81.70 and 82.50 for the rest of the month, before coming under further pressure in the first quarter of the coming fiscal year as more outflows are expected from emerging markets to US bonds with the continued tightening of US key rates.

“The extent of the outflows will depend on the minutes of the FOMC meeting,” said KN Dey, a veteran foreign exchange market consultant.
“At home, a strong currency may not be good for an economy with a growing current account deficit,” Dey said.