The central bank amassed nearly $60 billion through spot market interventions since the pandemic-induced lockdowns in March, which helped rein in the value of the rupee. It did not sell a single dollar in October for the first time in a decade.
A study by Reserve Bank of India (RBI) economists showed that volatility averaged 7.71% even among the worst days of the pandemic, compared with about 25% during the taper tantrum.
“The virus has hit all world economies,” said Anindya Banerjee, currency analyst at Kotak Securities. “India stood relatively resilient amid a bout of overseas fund inflows. Also, the central bank managed the show well with timely intervention, which in turn resulted in record high forex reserves.”
The RBI research notes that volatility in the currency markets has negative correlation with the Industrial output (IIP), which implies that a stable currency market could result in revival of industrial and economic activity.
“In a recent study for India, it was observed that realised volatility (historical volatility) in USD-INR is a key component of the Financial Stress Index (FSI), which in turn has statistically significant negative correlation with the Index of Industrial Production (IIP) and can act as a leading indicator for predicting IIP (or real economic activity),” according to the paper.
Notably, the Reserve Bank bought a record $59 billion between May and October this year after some net sales in March and April, RBI data showed. “The volatility would have surged had there been any panic selling in local securities,” Banerjee said.
The central bank did not sell a single dollar in October for the first time since August 2011, when the global economy and most emerging markets were grappling with the US taper tantrums and a downgrade of the US sovereign rating outlook.
“RBI has considered any level below Rs 73.50 as a buying level and therefore did not sell a single dollar during this period as there were sufficient flows and sellers in the market,” said Anil Bhansali, founder Finrex, a Mumbai-based advisory firm. “This happens very rarely but as RBI was only on the buying side for most of October absorbing the inflows, it did not sell a single dollar.”
The rupee was stable in October and was hovering between Rs 72.90 and Rs 74.60 a dollar, but toward the end of October, it moved above Rs 73.75 levels.
“Forex market interventions, along with other monetary and regulatory measures, have helped curb exchange market volatility and mitigated potential threats to financial stability” the RBI paper said.