The Reserve Bank of India (RBI) no longer needs to intervene forcefully in the foreign exchange market due to India's narrowing trade deficit, bond inflows, and less pressure on the rupee in the offshore market.

The RBI's interventions tapered off considerably earlier in the year; according to its most recent monthly bulletin, the RBI bought $8.5 billion in February without selling anything. Its gross FX intervention in February was around one-eighth of the average monthly intervention from October to December, and it was the lowest in the previous six months.

"Pressures (on the rupee) eased in the January-March period vis-a-vis October-December, which in turn reduced the magnitude of intervention," said QuantEco Research economist Vivek Kumar.

According to Kumar, the decline in India's trade imbalance was one of the causes that would have led to the decrease in foreign exchange activity. In March, the goods trade deficit shrank to a level not seen in eleven months. Economists predicted that India's current account will lead to a surplus in the March quarter.

According to a source familiar with the central bank's thinking, the statistics on the RBI's overall foreign exchange activity reflects its two-sided operations in the onshore spot and non-deliverable forwards market as well as the maturity of forwards.

This source, who asked to remain anonymous because they are not authorized to speak to the media, stated, "The gross amount will come down when the conditions are favorable and the RBI doesn't need to intervene in the offshore market."

The RBI's interventions tapered off considerably earlier in the year; according to its most recent monthly bulletin, the RBI bought $8.5 billion in February without selling anything.

Its gross FX intervention in February was around one-eighth of the average monthly intervention from October to December, and it was the lowest in the previous six months.

"Pressures (on the rupee) eased in the January-March period vis-a-vis October-December, which in turn reduced the magnitude of intervention," said QuantEco Research economist Vivek Kumar.

According to Kumar, the decline in India's trade imbalance was one of the causes that would have led to the decrease in foreign exchange activity. In March, the goods trade deficit shrank to a level not seen in eleven months. Economists predicted that India's current account will lead to a surplus in the March quarter.

According to a source familiar with the central bank's thinking, the statistics on the RBI's overall foreign exchange activity reflects its two-sided operations in the onshore spot and non-deliverable forwards market as well as the maturity of forwards.

This source, who asked to remain anonymous because they are not authorized to speak to the media, stated, "The gross amount will come down when the conditions are favorable and the RBI doesn't need to intervene in the offshore market."

The ratio of RBI's FX activity to the interbank spot and futures market turnover provides a comparative measure, even if statistics for the entire turnover in the non-deliverable forwards market is unavailable.

The ratio decreased from 0.14 in October to 0.01 in February, indicating a reduction in the level of interventions carried out by the Reserve Bank of India.

The IMF's December reclassification of India's currency rate system from "floating" to "stabilized arrangement" coincided with a decline in RBI's forex market activity.

According to ANZ Bank analyst Dhiraj Nim, "The decline in RBI's aggregate FX intervention may have been co-incidental with the IMF's reclassification." According to Nim, the central bank would probably focus its future FX interventions on purchasing dollars in order to absorb inflows and prevent the rupee from appreciating too much in comparison to other currencies like the Chinese yuan.