Dec 27, 2020

Central Bank likely to pump dollars in the market Featured

The Central Bank is likely to aggressively intervene in the money markets and pump US dollars this week to reduce pressure on the rupee which surged to Rs. 192.50 (per US dollar) last week.

“Since the Central Bank has said it would take ‘appropriate action’ to stem the fall of the rupee, there is a likelihood that it would release dollars into the market to reduce (dollar) demand and reduce the depreciation of the rupee,” one money market dealer said.

The Central Bank is learnt to have met senior officials of banks and urged them to go slow in opening letters of credit (LCs) and thus reduce pressure on dollars, using ‘moral suasion’ (an exercise where the banking regulator asks banks to follow certain guidelines instead of imposing such guidelines). For the most part of the year, the dollar has been trading at around the Rs. 185 level largely because imports have been restricted, in particular vehicles and non-essential imports, reducing demand for the foreign currency.

With just three more working days this year (Monday, Wednesday and Thursday with Tuesday being Poya day), the Central Bank will need to aggressively release dollars in the market for the rupee to gain by December 31, dealers said.

They said if the dollar rate did not change in the next few days from the current Rs. 192.50, it would have appreciated by a sharp 5.7 per cent or 10 rupees against the dollar from the end of 2019 when it was pegged at Rs. 181.93. At the end of 2018, it was pegged at Rs. 182.75 and at the end of2017 it was Rs. 152.85.

In a statement on Thursday, the Central Bank said the recent increase in volatility of the exchange rate was unwarranted and unacceptable.

“Accordingly, among other measures, the Central Bank will take appropriate action aggressively hereafter to contain this volatility in the domestic foreign exchange market. The Central Bank expects that these actions, together with the continuation of the curtailment of non-essential imports, will enable the rupee to appreciate within the next few days towards the levels of below Rs. 185 per US dollar observed in November 2020,” it said.

What prompted the surge in the dollars last week was believed to be a bunching up of delayed LCs entering the market pushing demand for dollars. Over the past few months, banks have been asked to stagger the issue of LCs to reduce demand in the dollar.