Forex reserves rise to near record on steady dollar inflow
Forex reserves swell to $320.56 bn, marginally below the 2 Sep 2011 high, and enough to cover 8 months' imports
Mumbai: India’s foreign exchange reserves have risen to a near all-time high riding on a steady inflow of dollars into the local debt and equity markets from foreign investors looking to increase their exposure to India on the hopes of an improved economy.
More than $2.7 billion were added to the nation’s foreign exchange reserves in the week ended 25 July, swelling the total to $320.56 billion, weekly data released by the Reserve Bank of India (RBI) showed on Friday. Only marginally below the 2 September 2011-high of $320.78 billion, India’s reserves are now roughly enough to cover eight months of imports, assuming a monthly import bill of about $40 billion.
Reserves have also rebounded sharply from the latest low of $274.80 billion seen in the week ended 6 September 2013, a period in which the rupee had plummeted to a historic ₹ 68.85 per dollar.
Samiran Chakraborty, head macro research, South Asia at Standard Chartered Plc said the sharp rise in foreign exchange reserves provides India with a cushion amid growing uncertainties in the global economy, referring to the recent default in sovereign bond repayment by Argentina.
Argentina missed interest payments on $13 billion in restructured bonds on Thursday, prompting global rating agency Standard and Poor’s to declare it as defaulter. The default, coupled with another round of reduction in the US Federal Reserve’s asset purchase programme, led to a fall in global markets and emerging market currencies on Friday, including in India.
The rupee weakened to close at 61.19 to the dollar, down 1.02% from the previous close of 60.56, its lowest level since 20 March. India’s benchmark index, S&P BSE Sensex, closed at 25,480.84 points, down 1.6% as foreign investors sold emerging market assets due to increased risk aversion.
However, bankers said the weakness in the rupee is temporary, adding the record foreign currency reserves give RBI enough room to intervene to smoothen the market if needed. For instance, currency dealers said that some perceived intervention from the central bank was seen on Friday to prevent a steeper fall in the rupee.
“Reserves are a powerful signal because it gives investors confidence that the country can afford to pay for its imports and more importantly that the country is ready in case global interest rates, particularly in the US, start rising again," said Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd.
Krishnamoorthy said the rupee has been well supported by robust inflows from foreign institutional investors, adding he expects the domestic currency to trade in the broad 58 to 62 per dollar range in the next six months.
Strong FII inflows have been one of the key factors behind the build-up of reserves in this calendar year. Since January, FIIs have invested $26.64 billion in India’s equity and debt markets, more than three times the $8.31 billion they invested in the same period in 2013.
Chakraborty from Standard Chartered said such inflows have helped the RBI shore up its foreign exchange reserves as it had bought the excess supply of dollars in the local market to prevent the rupee from rising sharply. A sharp appreciation in the rupee can hurt exports. While RBI does not target any particular level for the currency, RBI governor Raghuram Rajan had indicated that there is a range of tolerance. In an interview to Mint on 3 April, Rajan had said that he would consider levels of 55/$ to be “too strong."
Apart from the strong inflows from foreign investors, a special swap facility opened by Rajan in September last year has also helped build up reserves. The facilities which offered a discounted swap rate for funds raised through foreign currency non-resident deposits and for overseas foreign currency borrowings by banks raised $34 billion. While some of this was expended on a direct foreign exchange line opened for oil importing companies, the inflows via the facilities added to reserves as well. The two facilities were opened in early September after Rajan took over as RBI governor and closed on 30 November.
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