Mumbai: India’s foreign exchange reserves jumped by $5.84 billion to an all time high of $327.88 billion in the week ended 30 January, amid strong inflows from foreign institutional investors (FIIs) into the local debt and equity markets.
The increase in reserves is the biggest weekly gain the week ended 1 July 2011, when $6.70 billion were added to reserves.
While various factors such as revaluation of a foreign currency and a change in the value of gold holdings can play a part in the increase in reserves, the large inflow of dollars from FIIs during that week is likely to a played a big part.
FIIs bought $1.6 billion of equity and $816 million of debt in the week ended 30 January according to the figures released by the Securities and Exchange Board of India (Sebi). Cumulatively, net inflows into the equity and debt markets hit $6.6 billion in January—the strongest inflows seen in 35 months.
Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd said the jump in foreign exchange reserves could be mainly because the Reserve Bank of India (RBI) bought some amount of dollars in that week to prevent the rupee from rising.
“That has to be a massive reason together with the fact that some currencies like the euro strengthened slightly during that week. Also not to forget that there was a huge sale share of Coal India Ltd which must have attracted some dollars,” Krishnamoorthy said.
Coal India sold shares worth Rs.22,558 crore in the week ended 30 January.
RBI buys dollars in the foreign currency market in order to prevent the rupee from appreciating sharply. This ensures that the local importers and exporters are not exposed to sudden swings in the currency. A buildup in reserves has also been seen as a buffer for the future in case FIIs choose to exit their holdings in the event of disruptive global market developments.
RBI releases data of the amount of dollars it buys from the foreign exchange market but it comes with a lag of two months.
Krishnamoorthy said the RBI is clearly worried about a sudden pull out of investments by FIIs from the local market, as indicated by its recent decision to restrict FII purchases of short term corporate paper. FIIs invested a total of $3.7 billion in the debt market in India in January.