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Business Standard
4 days ago
- Business
- Business Standard
RBI winds down offshore currency tool reflecting shift in strategy
By Subhadip Sircar and Bhaskar Dutta India's central bank has scaled back its use of a key tool it deployed last year to counter the strong dollar, according to people familiar with the matter, reflecting a change in the authority's intervention strategy under its new leadership. The Reserve Bank of India 's short dollar positions in the non-deliverable forwards market have fallen sharply to below $5 billion, down from a peak of about $70 billion late last year, the people said, asking not to be named discussing private matters. The central bank had relied heavily on these offshore contracts in 2024 as the dollar surged, driven by a strong US economy and Donald Trump's presidential win. However, this year, the rupee has moved more freely against the greenback, suggesting a shift toward a more hands-off approach to currency management amid global trade uncertainty. 'A central bank cannot keep increasing its short forward book without losing the efficacy of this tool. So to prepare for further volatile events, the RBI will reduce its forward book substantially, if not completely,' said Dhiraj Nim, currency strategist at Australia & New Zealand Banking Group Ltd. An email sent to the RBI seeking comment on the matter didn't immediately receive a response. Using offshore non-deliverable forwards has a number of advantages for central banks, including potentially lower costs and the fact that they don't drain official reserves. That's because the NDF contracts allow the central bank to influence the rupee's levels without actually selling large amounts of dollars. Such interventions can also act as a signal of intent in the spot market, thus boosting the rupee when markets are volatile. The RBI's heavy reliance on the offshore market last year was in sharp contrast to its usual practice of curbing swings in the rupee onshore. Under Governor Sanjay Malhotra, who took office in December, the central bank has brought a large portion of its derivatives intervention to the local market. The reduction in the offshore exposure accounts for most of the recent drop in the RBI's overall forward dollar positions, the people said. As of April, the total forward book — covering both local and offshore markets — stood at about $73 billion, down from a record $88.8 billion in February. More than half the book was within the 3-month to 1-year maturity bucket, indicating a large portion of the book had been brought onshore. However, the RBI isn't worried about the potential drain on its reserves from these dollar sales. 'We are not unduly concerned about that,' Governor Malhotra told reporters on Friday after cutting interest rates for a third straight meeting. 'If there are opportunities, we can build reserves.' India's foreign exchange reserves have rebounded to $692 billion, nearing the record high of $705 billion hit in September. Still, the RBI will likely need to continue adding to its reserves over the next three months to cushion any impact of $14.7 billion in maturing short positions through July, Nomura Holdings Inc. analysts wrote in a note. More than two-thirds of the contracts in the overall forwards book were in the three months to one-year bucket and are unlikely to be rolled over, according to DBS Bank Ltd. The RBI's unexpected decision to cut banks' cash reserve ratio and free up ₹2.5 trillion in liquidity was also aimed at offsetting likely liquidity strain from unwinding short positions, according to the lender. When the RBI sells dollars to banks, it absorbs rupees, potentially tightening financial conditions. 'Liquidity infusion via the CRR cut would also aid this process and ensure it is non-disruptive, while shielding the currency,' said Radhika Rao, senior economist at DBS Bank.
Yahoo
27-01-2025
- Business
- Yahoo
China's Economy Loses Momentum Ahead of Major New Year Holiday
(Bloomberg) -- China's factory activity unexpectedly slowed ahead of China's Lunar New Year holiday and the services sector cooled, signs stronger fiscal stimulus is needed even after a recent stimulus push. What Happened to Hanging Out on the Street? Vienna Embraces Heat Pumps to Ditch Russian Gas Billionaire Developer Caruso Slams LA Leadership Over Wildfires How Sanctuary Cities Are Preparing for Another Showdown With Trump Hoboken PATH Station Will Close for Almost a Month on Jan. 30 The official manufacturing purchasing managers' index fell to 49.1, the lowest since August, missing economists' forecast for a modest expansion. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction. While factory activity typically cools before the Chinese New Year period as production winds down, economists said the slowdown this month was more severe than usual, adding to signs of weakness despite recent efforts to boost the world's second-largest economy. 'The extent of decline is beyond our expectation,' said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd, adding that a stronger fiscal policy and a cut to the reserve requirement ratio for banks are still on the table. 'The economy is far from recovering.' The CSI 300 Index of onshore Chinese stocks swung to losses after posting a modest gain. China's 30-year government bond futures rallied 0.7%, while the yuan fell about 0.3% in both onshore and overseas trading. The PMI figures released Monday by the National Bureau of Statistics are the first official data available each month to provide a snapshot of the health of the Chinese economy, which is struggling to overcome the twin challenge of weak domestic demand and growing trade headwinds. What Bloomberg Economics Says... 'The first major read on China's economy at the start of 2025 is alarming — growth lost momentum even after intensified stimulus toward the end of last year.' — Chang Shu and Eric Zhu Read the full note here. As competition intensified and deflationary pressures mounted, China's industrial firms saw their profits drop in 2024 for the third consecutive year. Industrial profits at large Chinese companies fell 3.3% last year, although a 11% surge in December helped recoup some losses. Both production and new orders fell to a five-month low, according to the PMI data. New export orders dropped to the lowest since February, suggesting weak global demand. Manufacturing was 'affected by the approaching Spring Festival holiday and the concentrated return of employees to their hometowns,' Zhao Qinghe, senior statistician at the NBS. Zhiwei Zhang, chief economist at Pinpoint Asset Management, said while factory activity slowed in part because of the eight-day New Year holiday in January, it could also mean exports benefited less from businesses front-loading their orders to dodge any new tariffs. Steep US levies could hurt China's exports, which made up nearly a third of growth last year, and add to costs for manufacturers that are already facing price pressure from intense competition and sluggish consumer sentiment. US President Donald Trump has so far refrained from imposing tariffs on China in his first days in office, although his plans remain unpredictable. China met the official growth target of 5% last year, thanks to a late policy blitz and export boom. But the economy's recovery has been uneven, with manufacturing at times a bright spot while consumption has been weighed down by a weak jobs market and a prolonged real estate crisis. China's trade surplus soared near an unprecedented $1 trillion last year, a growing imbalance that has spooked trade partners. Among them, the European Union has accused Beijing of building excess capacity in its industries through state subsidies and put up new trade barriers that held back sales of electric vehicles. --With assistance from Yujing Liu, Tian Chen and Zhu Lin. (Updates with market reaction, more details throughout. A previous version corrected manufacturing PMI forecast.) Forget Factories, Small US Towns Want Buc-ee's Gas Stations The CDC Won't Give the Public a Full Picture of Fertility Treatment Risks Elon Musk's Inaugural Highs (and Lows) How Kendrick Lamar Turned Beef With Drake Into Music Superstardom Greek Police Say Eggs Were Stolen from IVF Clinic Patients ©2025 Bloomberg L.P. Sign in to access your portfolio
