RBI is biggest buyer of dollars among Asian central banks

India’s foremost lender, the Reserve Bank of India (RBI), has bought the most dollars among all Asian apex banks of late.

Is the RBI nervous or it simply wants to project itself as a manufacturing base?

Australia & New Zealand Banking Group Ltd (ANZ) sees this as a sign that the RBI may be worried about a sovereign credit downgrade, a Bloomberg report said.

While China purchased $55 a billion of foreign exchange in the four months to July, RBI purchased $30 billion of foreign exchange to bolster what is already the world’s fifth-largest FX hoard. “That accounts for more than half of Asia intervention during the period,” said Khoon Goh, head of Asia Research, ANZ, in a note.

So, does the purchase represent RBI’s changing forex policy? Khoon Goh’s note on the matter suggests it is indeed changing. “The persistent intervention even when the Indian rupee had not been under strong appreciation pressure represents a change in the RBI’s forex policy,” Goh said in the note. Another possibility is a “desire to build a bigger buffer amid India’s deteriorating fiscal position to safeguard against a further downgrade in the sovereign rating.”

A Bank of America estimate suggests that RBI will buy $45 billion of forex this fiscal year, of which $34.2 billion has already been purchased, the ANZ note stated last week. On the flip side, the action may place India back on the US Treasury’s semi-annual forex monitoring list soon.

Related news: Centre to get ₹57,000 crore as dividend from RBI

ANZ also hinted at the possibility that the RBI may be seeking to improve India’s appeal as a manufacturing base.

With 4.8% losses this year, the Indian rupee is the second-worst performer among emerging Asian currencies.

“RBI will continue to buy USD during periods of strong inflows,” said Kaushik Das, chief India economist at Deutsche Bank AG. It wants to “to prevent an appreciation in rupee in real effective exchange rate terms, which could hurt export competitiveness, and to strengthen reserves adequacy position further.”