Figure 1 shows the monthly net purchase of dollars by the RBI in the foreign market for the last five years, compared to net FII flows in debt and equity markets in India. It shows that nearly every month, RBI has bought up the entire FII inflows and more. In many cases, the purchase by RBI has been many times the total inflow of dollars that has come through FIIs. Estimates suggest that about half of incremental foreign capital inflows of FIIs are through PNs. Even if all FII flows had been banned, going by the RBI’s net purchase of dollars we can deduce that the rupee would still have faced pressure to appreciate. (Since data for intervention is available with a two month lag, we can use changes in net foreign exchange assets with the RBI which is a good proxy for RBI intervention for recent periods. The figure of USD 11.8 billion for September ‘07 is based on the change in foreign exchange assets.)

Have the recent weeks been different? Is it that after the US subprime crisis and the Fed rate cut, a big share of global equity portfolio flows have come into India and changed the picture? In the week of September 24 to 29, reserves increased by USD 10.84 billion. FII inflows were only USD 2.6 billion. The story that RBI has been buying much more than FII flows, even after the restrictions on external commercial borrowings were imposed in May this year, shows that dollars are flowing in through multiple channels.

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