Fx Intervention (Onshore + Offshore) through the lens of Durable Liquidity

Summary: In this article, I have attempted to estimate the Fx Intervention - both onshore and offshore by using Durable Liquidity and RBI data on Sale / Purchase of USDs and Outstanding Forward Position. I also reckon that Durable Liquidity and CiC numbers can help give broad estimates of Fx intervention on a more real time basis relative to the release of the monthly bulletin.

According to my calculations, between Aug / Sep / Oct , RBI intervened close to $ 40 bn. The Central Bank is now allowing it to gradually roll off and ~ $19 bn of NDF positions have rolled off since peak intervention.

The Durable Liquidity increased 22,928 crs over the fortnight ending 08 Mar 2024 to 186,908 crs. Remember, Changes in durable liquidity arises from permanent or long term changes in the liability of the Reserve Bank, i.e. change in Currency in Circulation (CiC) or change in Banking System Reserve Balances due to unsterilized Fx intervention or OMOs.

CiC has increased to the tune of 36,412 crs over the fortnight which implies RBIs FX intervention is to the tune of 59,340 crs which translates to $ 7 bn.

As per the monthly RBI Bulletin released earlier this month, the return-leg of the Sell-Buy Swap Auction for $ 5bn injected INR liquidity to the tune of 42,800 crs on Mar 11, 2024.

Since the numbers reported are as on 08 March 2024 and the Spot date as on 08 Mar is 12 Mar, it is my understanding that the return leg of the swap position has been accounted for in Spot balances, i.e. reflected in FCA (Foreign Currency Assets).

So net liquidity impact through Fx operations excl the swap is $ 2 bn - this could either be on account of Spot purchases or near leg of the BS. We will get more clarity on the same after RBI releases the monthly bulletin.

Through the lens of durable liquidity, my estimates for year round intervention and composition of intervention until Dec 2023 are stated in the table below.

RBI Reports Sale / Purchase of USD in Onshore / Offshore OTC Segment, Currency Futures Segment and Maturity Breakdown of Outstanding Forwards. Now what I've tried to do here is bifurcate the change in durable liquidity into namely three components - Change in liquidity due to change in CiC / OMOs / Fx Operations.

▲Durable Liquidity = (-1)*▲ (CiC) + OMO Sale – OMO Purchase +/- FX Intervention

So the durable liquidity number adjusted for CiC and OMOs, gives me the liquidity change on account of Fx operations. Liquidity changes due to Fx operations of RBI either through Spot Purchases or Near Leg of an Fx Swap.

Implied intervention derived through Durable Liquidity Measures (as derived above)

= Spot Purchases/Sales (as reported by RBI) + Near Leg of Deliverable Fx Forward -------- A

The residual figure , Near Leg of Deliverable Fx Forward, gives us the total amount of RBI intervention through Onshore Forwards , since you have the near leg, you know the far leg for the swap.

Change in Forward Position (as reported by RBI) = Implied Onshore Forward Position (Equation A) + NDF Position

We can find the RBIs operations in Offshore segment through the above.

The above data also highlights that between Aug / Sep / Oct, RBI intervened a total of $ 40 bn through NDF which it is letting gradually roll off. In the month of Nov and Dec, ~ $ 11 bn of NDF positions were rolled off. In the month of January, another $ 7.50 bn of NDF positions likely rolled off.

I reckon this model needs to be refined further. Please share your inputs.

Please note I updated the article today morning and as I refine this further , basis the inputs and my own analysis, I will keep updating this instead of publishing new articles.

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