Forex intervention operations of RBI

 

Forex intervention operations can be defined as a transaction by an official agent of the government, to influence the value of the exchange rate.  In other words , Forex Intervention operations of RBI can be defined as the official purchase or sale of foreign assets against domestic assets in the foreign exchange market.

According to Section 40 of the RBI Act, Reserve Bank can buy or sell foreign currency to any authorized person. In addition to US dollar, RBI has the option to use the Euro as an intervention currency.

Purpose of intervention

Generally, Forex  intervention is used as a tool for regulating the external value of rupee. However, intervention can also be used as a tool of monetary policy because of its impact on liquidity. When the central bank buys foreign exchange from the market, it infuses an equivalent amount of rupee funds into the system (injection of liquidity); the opposite happens when it sells foreign exchange in the domestic market. Over the years RBI has intervened in the forex markets either directly or indirectly.

Direct intervention

Banks are contacted directly and asked to quote a price and the RBI buys or sells at the quoted rate. In 1995-96, most of the transactions were done directly with the authorized dealers.

Indirect intervention

RBI intervenes indirectly through select public sector banks. These banks, in turn, buy or sell on behalf of RBI in the market. Indirect interventions became the primary mode of intervening in the forex market by RBI since 1997-98.

Interventions are ordinarily done in the spot market. But, RBI sometimes intervenes in the forward and swap markets also .