How does RBI check the rupee's plunge and why?

The Reserve Bank of India has turned to futures market to check the rupee's plunge as the local unit hit all time low at 69.10 a dollar, dealers said.It is said to have sold over $500 dollars in July futures contract, a move that has helped the local unit to erase some of its early losses, they said.At 10.35 hours the rupee is trading at 68.97/$ versus 68.63 closed on Wednesday. It hit record low at 69.10 sliding past its earlier all time record low 68.86 touched on November 24, 2016. Why futures market?The central bank normally intervenes in the spot market to curb wild swings in the currency market. But such move increases or reduces rupee liquidity or available cash in the banking system distorting inflation dynamics and bond yields, two important factors for monetary policy framing. In the past few months the benchmark bond yields have been rising. It pierced the psychological mark at 8% raising overall borrowing costs. Such phenomenon calls for more open market operations (purchase), a market matrix that helps bringing down yields. Under OMO purchases, the RBI buys bonds infusing liquidity in the system. Now, if the central bank conducts spot market intervention to sell dollars and buy rupees, it nullifies the OMO effects reversing the liquidity. "The intensity towards spot market intervention could low while futures market makes sense for the RBI," said a treasury head of a large bank.Also, the RBI does not want to show any desperation as the rupee weakening is apparently paints negative picture the country, that is going for general elections."All other emerging market currencies including Chinese yuan have lost value to the dollar with investors seeking safety of safe heaven US-backed asset. The rising crude prices too threatens to upset fiscal math for countries that meets their requirements through overseas shipments. Moreover, India tends to lose more after US administration warned of economic sanctions on countries importing oil from Iran, a major supplier for India. 64773379

from The Economic Times https://ift.tt/2IyrHKw