GalaTime

Two headlines of note:

RBI forex purchase grew 3-fold in FY07: “the Reserve Bank of India bought about three times more foreign exchange in 2006-07 at $26.82 billion against $8.14 billion in 2005-06″.

RBI bought $2.3 billion in March to check rupee rise: “India’s central bank bought $2.3 billion in intervention in March, sharply lower than its record $11.9 billion dollar purchases in February”.

We know what happened to the rupee in March & April: it dropped from 44.5 to 40.5 versus the dollar. If we extrapolate this, where would the USD:INR exchange rate be, had the RBI not purchased a single dollar since April 2006? 35? 30?

I’m not sure if anyone has done a correlation analysis to figure out how much rupee weakness can be bought for every billion dollars added to our forex reserves. Simply looking at February and March, it would seem that a difference of $8.6B resulted in a 160 paise move in the $:Rs rate. In other words, each $1B is worth almost 20 paise.

Now, look at this table from the May 2007 RBI Bulletin:

Source: 48. Sale / Purchase of US Dollar by Reserve Bank of India

Since April 2006, the RBI has purchased a total of ~ $26B. Assuming 20 paise per $1B, this works out to 520 paise (Rs 5.2). Back in April 2006, the USD:INR rate was ~44.5; and had the RBI not intervened at all, the rupee should have moved to 39.3 versus the dollar by April - only 3% further from the curent rate of 40.6.

So there you go- I bet you can’t find a more simplistic methodology for forecasting the exchange rate! Can’t wait for the economist in you to shred this logic to pieces

This entry was posted on Tuesday, May 15th, 2007 at 11:17 am and is filed under exchange-rates. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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