Why has the Reserve Bank of India’s (RBI) intervention in the foreign currency markets to defend the rupee been so timid? The accompanying chart from Nirmal Bang Institutional Equities indicates the reason—short-term forex debt falling due in less than a year now amounts to more than 40% of our forex reserves. The report by Hemindra Hazari, Manuj Oberoi and Apurwa Shiva points out, “Despite the size of India’s foreign exchange reserves, it is in a vulnerable state as short-term obligations form a large component and, hence, the Reserve Bank of India does not want to fritter it away in defending the rupee from depreciating at this stage. The central bank would probably defend the rupee more vigorously in case of a severe external shock like a crisis in the euro zone, leading to mass flight of capital from India.”
Note that apart from the short-term debt, portfolio funds, which can be speedily withdrawn in the event of a crisis, are also sizable. Also, unlike many Asian countries, India’s forex reserves are the result of not the current account surpluses, but capital inflows, which have slowed considerably of late.
Also See | Chart of the day (PDF)
PDF by Sandeep Bhatnagar/Mint