Fall in forex reserves mainly on revaluation

Nearly two-thirds of the $61-billion decline in India’s foreign exchange reserves was on account of valuation losses, indicating that the Reserve Bank of India (RBI) had now lowered its market intervention to check volatility of the rupee against overseas currencies.

According to market sources, the central bank has largely been absent from the foreign exchange market in recent weeks despite the rupee touching an all-time low of 52.18 against the US dollar on March 3. Foreign exchange dealers said that the RBI did not want to intervene heavily as it wanted to avoid sucking out rupee resources by selling dollars.

So far in 2009, the rupee has dropped by 3.46 per cent against the dollar as foreign institutional investors (FIIs) have continued to sell their investments in India, partly on account of the demands in their home markets.

According to the latest data released last Friday, the country’s foreign exchange reserves were estimated at $248.72 billion as on March 13, as against $309.71 billion at the end of March 2008. As on February 27 2009, the foreign exchange reserves were estimated at $249.28 billion.

A bulk of the decrease in the reserves has been on account of lower foreign currency assets. At the end of February, foreign currency assets had dropped by $60.52 billion, which also indicates that the fall was on account of revaluation.

In recent weeks, the dollar had gained against most currencies globally, till the US Federal Reserve’s announcement to buy long-dated debt. On Thursday, following the proposed move, the US currency fell the most in 25 years.
 

LOWER INTERVENTION Sale and purchase of US dollars by RBI
	Net purchase
April, 2008	4,325.00
May, 2008	148
June, 2008	-5,229
July, 2008	-6,320
Aug, 2008	1,210
Sept, 2008	-3,784
Oct, 2008	-18666
Nov, 2008	-3101
Dec, 2008	-318
Jan, 2009	-29
2008-09	-31764
Data in $mn Source: RBI

A majority of India’s foreign exchange reserves are parked in US Treasury and highly-rated paper issued by sovereigns and financial institutions.