Home / News / India /  India's forex reserves rise $2.135 bn in latest week; RBI's policy measures likely to drive the market

India's forex reserves rise $2.135 bn in latest week; RBI's policy measures likely to drive the market

All components in forex reserves climbed with gold reserves outperforming foreign currency assets (FCA) in the week. (PTI)Premium
All components in forex reserves climbed with gold reserves outperforming foreign currency assets (FCA) in the week. (PTI)

  • As per RBI's latest weekly statistics data, India's forex reserves climbed by $2.315 billion to $573.875 billion in the week ending July 29. In the previous week ending July 22, the reserves witnessed a decline of $1.152 billion.

India's foreign exchange (forex) reserves picked momentum in the week ending July 29 with a rise of $2.315 billion to $573.875 billion. All components in forex reserves climbed with gold reserves outperforming foreign currency assets (FCA) in the week. On Friday, RBI announced key measures that are likely to protect the Indian rupee at the interbank forex market and further drive the reserves. The country's forex reserves have been volatile amidst macroeconomic uncertainties.

As per RBI's latest weekly statistics data, India's forex reserves climbed by $2.315 billion to $573.875 billion in the week ending July 29. In the previous week ending July 22, the reserves witnessed a decline of $1.152 billion.

In the week under review, foreign currency assets which is the largest component in forex reserves stood at $511.257 billion up by $1.121 billion compared to the previous week. In the week ending July 22, FCA saw a decline of $1.426 billion.

On the other hand, gold reserves jumped by a whopping $1.140 billion to $39.642 billion in the week ending July 29. In the previous week, gold reserves only grew by $145 million.

Further, SDRs advanced by $22 million to $17.985 billion in the week ending July 29, while the reserve position in IMF rose by $31 million to $4.991 billion compared to the previous week.

As per the latest data of NSDL, foreign portfolio investors (FPIs) investment picked up in August. So far this month, till August 5, the FPIs have pumped in 14,175 crore in the equity market compared to the 4,989 crore inflow of July.

On Friday, the rupee appreciated by 16 paise to end at 79.24 against the US dollar after RBI's rate hike and positive domestic equities. The local unit snapped a two-day losing streak against the American currency at the interbank forex market. The rupee had floated between the day's high and low of 78.94 to 79.29 against the dollar in the day. On the previous day, the rupee was at 79.40 against the greenback.

Abheek Barua, Chief Economist at HDFC Bank said, "Unlike previous policies, the central bank also discussed the resilience of India’s external balances implicitly communicating its preference for not just a less volatile rupee but also perhaps some resistance towards very sharp depreciation in the rupee. One senses a degree of optimism around not just the current account balance but also on its financing (NRI deposits, FII and FDI flows etc) from the central bank. While this could very well pan out, given the ongoing global tightening – both of rates and central bank balance sheets – we do see upside risks on both CAD and the BoP position."

"The USD/INR pair could therefore continue to see depreciation pressures in the near-term, although the RBI would be willing to intervene rather aggressively to stall the pair from moving above 80 levels," Barua added.

In the latest monetary policy, RBI announced key measures that is expected to strengthen forex reserves of the country going forward. 

RBI has raised the policy repo rate by 140 basis points in the last three policies. To tackle mounting inflationary pressure, RBI hiked the repo rate by 40 basis points in May followed by a 50 basis points hike in June and another 50 basis points increase in the August 2022 policy.

Now, RBI's repo rate is at 5.40%, while the standing deposit facility (SDF) rate stands adjusted to 5.15% and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%.

Shanti Lal Jain, MD & CEO of Indian Bank said, “To rein-in the runaway inflation, the RBI raised the Policy rates by 50 bps. The CPI inflation continued to breach the RBI’s upper target range for the sixth straight month and remained above 7% for the third month in a row. Through this policy, RBI has brought in several measures including raising of policy rates by 50 bps so as to maintain price stability while keeping in mind the objective of growth," adding, "the central bank has already started tightening the liquidity in the system along with withdrawal of accommodative stance in a calibrated manner. However, the domestic inflation, which has been mainly driven by supply side constraints, appears to have peaked off."

The Indian Bank CEO also said, "to allow Standalone Primary Dealers (SPD) to offer Forex services as AD category bank will strengthen the Forex market. Further, by permitting SPDs for Offshore Rupee OIS will remove the segmentation of domestic/offshore prices. By enabling cross border inward bill payment system, ease and convenience of the NRIs will improve along with the forex inflow."

To strengthen the role of Standalone Primary Dealers (SPDs) as market makers, RBI proposed to enable SPDs to offer all foreign exchange market-making facilities as currently permitted to Category-I Authorised Dealers, subject to prudential guidelines.

RBI said, "This measure would give forex customers a broader spectrum of market-makers in managing their currency risk, thereby adding breadth to the forex market in India. Wider market presence would improve the ability of SPDs to provide support to the primary issuance and secondary market activities in government securities, which would continue to be the major focus of primary dealer activities."

Further, Jain said, "Setting up a committee for removing the hurdles related to MIBOR will help in the transition of MIBOR as an international alternate benchmark."

The Mumbai Interbank Outright Rate (MIBOR) based overnight indexed swap (OIS) contracts are the most widely used interest rate derivatives (IRDs) in the onshore market.

In its statement, RBI said, the MIBOR benchmark rate, calculated based on call money deals executed on the NDS-call platform in the first hour after the market opening, is based on a narrow window of transactions. Internationally, there has been a shift to alternate benchmark rates with wider participant bases (beyond banks) and higher liquidity.

Thereby, the central bank has proposed to set up a committee to undertake an in-depth examination of the issues, including the need for transition to an alternate benchmark, and suggest the most appropriate way forward.

Raghvendra Nath, Managing Director – Ladderup Wealth Management on the overall policy said, "As indicated by RBI in the MPC, the GDP growth is likely to remain intact and they do not expect any major changes in the GDP estimates going forward. However, considering RBI's expectation of higher inflation in the next 2-3 quarters, 50 bps hike seems to be a decision in the right direction. RBI has moved away from its accommodative stance. The RBI will keep a close watch on the inflation levels which is dependent on several factors like commodity prices, monsoons, etc. We believe the rate hike is likely to have an impact on the consumption levels in the economy. Due to this we may witness lower GDP numbers compared to the estimate."

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