Forex reserves, rupee recoup half their Apr-Aug losses

RBI's swap windows have boosted foreign inflows over the past two months

After hitting a 39-month low in early September, the country’s foreign exchange reserves have reversed their downward trend, amid a stabilising currency, to add $9 billion to the total over the next seven weeks, latest data released by the Reserve Bank of India (RBI) show.

From $294 billion at the start of April this year, India’s forex reserves had slid 6.8 per cent to $274 billion as on September 6. Since then, backed by several steps taken by RBI to boost inflows, these had risen 3.2 per cent to almost $283 billion by the week ended October 25. The reserves were at $272.78 billion in the week ended June 11, 2010.

Among the various measures taken by RBI was the introduction of a dollar-rupee swap window for fresh Foreign Currency Non-Resident Account (Banks) deposits, or FCNR (B) dollar funds, which came into effect on September 10 and are to be open till November 30. In September, the central bank had also set up a swap window for banks to allow them to borrow up to 100 per cent of their Tier-I capital from abroad.

Since the opening of these two windows, the country had received $12 billion worth of inflows till October 29, RBI Governor Raghuram Rajan had said in a post-monetary-policy conference call for researchers and analysts on Wednesday.

Similarly, in the past two months, the rupee, too, has recouped half its losses since the beginning of the financial year. The Indian currency, depreciating 26.8 per cent in the April-August period, had hit an all-time low of 68.83 a dollar on August 28. Since then, it has recovered 10.3 per cent, though its value against the dollar is still 13.73 per cent lower than that on April 1.

“There has been an inflow of about $1 billion from foreign Institutional Investors (FIIs) in October and we have also seen inflows on the back of FCNR (B) deposits. These inflows have helped boost the reserves. The FCNR (B) window will continue till November 30, so an additional of $8-10 billion will come to the market. This window will be kept open till November-end because RBI wants to rebuild the reserves and FII flows are uncertain,” said Partha Bhattacharya, deputy CEO, Mecklai Financial.

On Friday, the rupee had fallen marginally to 61.73 a dollar, compared with 61.50 the previous day.

For the future, sentiment on the currency is positive, as the current account deficit is seen narrowing, though it might stay above the central bank’s comfort zone of 2.5 per cent of gross domestic product. However, the decision of the US Federal Reserve to taper its bond-buying programme, when it comes, can have adverse impact on emerging-market economies.

“The outlook is bright, at least for the short term. But, we must remember that the US Fed taper is around the corner. The general elections, too, are around the corner. Besides, there also remains a question  mark on economic growth. In the medium term, these could cause of relapse of a negative sentiment. RBI is building reserves to prepare for those times; that is good,” said G Ananth Narayan, regional co-head (global markets and wholesale banking, South Asia), Standard Chartered Bank.

However, Rajan had on Wednesday expressed confidence and assured the market that India was in a better position to face Fed’s tapering. “We are in a better position to face tapering, as and when it occurs,” he had said.