ECB stimulus to help RBI boost FX reserve

The asset purchase plan of euro 60 billion a month by the European Central Bank (ECB) is expected to help the Reserve Bank of India (RBI) to boost its foreign exchange reserves further.

This is likely as India will continue to attract foreign flows and the central bank might not allow the rupee to appreciate significantly against the dollar.

ECB president Mario Draghi (pictured) announced an expanded asset purchase programme, including private and public securities, to spur growth and counter deflationary pressures.

India, being an attractive market among BRICS economies, has been already seeing foreign flows in both debt and equities.

“Whatever tensions were created due to expectations of monetary tightening in the US has been mitigated due to the ECB's decision. For RBI now, maintaining the rupee closer to its fair value will be a concern,” said Rupa Rege Nitsure, chief economist and general manager, Bank of Baroda.

Data released on Friday showed RBI's foreign exchange reserves rose by $236.4 million for the week ended January 9 to $319.48 billion. Foreign currency assets, a key component, rose by $308.5 million to $294.85 billion.

“RBI has been trying to mop up excess supply of dollars, so that rupee does not appreciate beyond a point. The rupee might not have much of an impact due to the ECB's decision because RBI will continue to do so. For foreign investors, investing in growth centres like India makes sense. RBI will ensure their war chest is strong and whenever the hot money tries to go back, there is no sudden volatility in the system,” said Ashutosh Khajuria, president (treasury), Federal Bank.

On Thursday, the rupee ended at 61.71 to the dollar, compared with the previous close of 61.64.

State-run banks were seen buying dollars on behalf of RBI.

Till October 2014, the US Federal Reserve was also pumping liquidity through a bond-buying programme.

The Fed's meeting last month confirmed that being “patient” on interest rates meant no increase before late April.

Since the start of January, the rupee has already appreciated a little over two per cent. Most of this was because of bullish equities.

However, since the start of this financial year (April 1, 2014), the rupee has depreciated by three per cent. Most of this is attributed to RBIs intervening in the market to absorb dollar flows.