BackIndia’s reserves rise to record in fastest BRIC accumulation
India's reserves rose about 10% in the past 12 months, while Brazil saw holdings decline by 0.4% to $374 bn and in Russia they fell by 28% to $339 bn
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Mumbai: India’s foreign-exchange reserves rose to a record as policy makers looked to protect the economy against outflows from a probable increase in US interest rates.
Holdings climbed $2.7 billion in the week ended 16 January to $322.14 billion, a Reserve Bank of India statement showed on Friday. Foreign funds, buoyed by near-zero borrowing costs in Europe and the US, poured $42 billion into Indian stocks and bonds last year.
India’s larger currency stockpile and narrowing trade deficit reduces vulnerability to external shocks, providing governor Raghuram Rajan room to cut interest rates this month for the first time since May 2013. The increase in reserves over the past year is the fastest among the largest emerging markets.
“It’s critical to augment reserves," said Sujan Hajra, an economist at Anand Rathi Financial Services Ltd. in Mumbai. “They will provide a buffer against a selloff when the Federal Reserve hikes rates or if there is more global turmoil."
The rupee has surged about 12% from an all-time low in August 2013, when Morgan Stanley dubbed the currencies of India, South Africa, Brazil, Indonesia and Turkey as the “fragile five" because of their difficulties in drawing capital to finance deficits.
Since then, Rajan has lured inflows by offering discounted dollar-swaps to banks and overseas investors bought a record $26 billion of Indian bonds last year on optimism the most stable government in 30 years will help improve finances in Asia’s third-largest economy.
US policy
India’s foreign-exchange reserves rose about 10% in the past 12 months, while Brazil saw holdings decline by 0.4% to $374 billion and in Russia they fell by 28% to $339 billion, according to data compiled by Bloomberg. China’s reserves rose 0.6% to $3.8 trillion.
The primacy of US-based funds in Indian debt may cause adverse effects in case of unexpected changes in US monetary policy, the Reserve Bank of India said in its financial stability report 29 December. Foreign-exchange reserves provide the first line of defense against sudden outflows, executive director Deepak Mohanty said last year.
The Fed will raise the upper bound of the Federal Funds target rate to 0.75% in the third quarter of 2015 from 0.25%, according to the median estimate in a Bloomberg survey published this month. That risks eroding the 2% return offered this year to purchasers who borrow in dollars and invest in Indian rupees, the highest return among 23 emerging- market currencies tracked by Bloomberg. Bloomberg
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