Mar 3, 2000|
What does the RBI's move to absorb US Dollar inflows imply?
The Reserve Bank of India (RBI) has reported to have been a large buyer of US dollars in the foreign exchange markets. The amount is rumoured to be in the vicinity of US$ 200 m and has been bought via state run banks.
The inflow of foreign funds into India has jumped in recent months. This has been largely due to a rise in inflows on account of higher foreign institutional investment (FII) and foreign direct investment (FDI) inflows. Another contributor has been the rise in export remittances.
The surge in inflows has also contributed to the stability in the value of the rupee despite that fact that India's trade balance has come under pressure due to the sharp rise in the oil import bill.
When the RBI purchases US dollars from the market it indirectly infuses liquidity in the system. This is because it pays Indian Rupees to purchase the US Dollars. This implies that the RBI's recent mopping up spree will have a cooling off effect on any upward pressure on interest rates if there were a rise in demand for funds.
Sometimes, however, an excess of liquidity could spill over into inflation. But in the Indian context this fear is limited, as there is a significant output gap in the economy i.e. excess capacity.
Whether the excess liquidity in the markets will spur the banks into reducing rates is unlikely. This is mainly due to the fact that the benchmark lending rates of the RBI have not been reduced. Moreover, the government's borrowing spree continues unabated. This is likely to result in the mopping up of liquidity from the markets. This leads us to the conclusion (as always) that for interest rates to be reduced there needs to be a decline in government deficits, which ultimately determine the borrowing levels.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407