India's foreign exchange reserves cross $500 bn for the first time

Currency dealers say there were dollar inflows on account of Reliance Jio and Airtel deals, which the central bank absorbed

The country’s foreign exchange reserves crossed the $500 billion mark for the first time as the central bank absorbed inflows at a time when there was not enough demand for foreign currencies from the oil marketing companies amid a lockdown and collapse in oil prices.

India had forex reserves of $501.7 billion as of June 5, a rise of $8 billion in a week. This is the highest weekly increase since September 28, 2007. Most of the rise is owing to foreign currency assets.

Currency dealers say there was dollar inflow on account of Reliance Jio and Airtel deals, which the central bank absorbed. If the flows were not absorbed, rupee would have appreciated substantially, which is detrimental to exports.

Besides, the increased forex reserve means the country’s import cover is also improving. As of May 22, when the RBI announced its monetary policy, the reserves — at $486 billion — were enough to cover one year’s import. The import cover has improved with accumulation of reserves.

The forex reserve comprised of foreign currency assets ($463.63 billion), gold ($32.35 billion), Special Drawing Rights of the International Monetary Fund (IMF) of Rs $1.44 billion, and reserve position in the IMF of $4.28 billion, showed data released on Friday.

Currency dealers say there was dollar inflow on account of Reliance Jio and Airtel deals, which the central bank absorbed. If the flows were not absorbed, rupee would have appreciated substantially, which is detrimental to exports.

Besides, the increased forex reserve means the country’s import cover is also improving. As of May 22, when the RBI announced its monetary policy, the reserves — at $486 billion — were enough to cover one year’s import. The import cover has improved with accumulation of reserves.

The forex reserve comprised of foreign currency assets ($463.63 billion), gold ($32.35 billion), Special Drawing Rights of the International Monetary Fund (IMF) of Rs $1.44 billion, and reserve position in the IMF of $4.28 billion, showed data released on Friday.

Year-to-date, the rupee has depreciated 6 per cent, closing at 75.84 a dollar. According to one measure of the real effective exchange rate (REER), the rupee is way undervalued, and should strengthen going forward. But that is unlikely to happen now. 

Currency dealers say the RBI will continue to accumulate forex at every opportunity to keep India’s external sector health in top shape in this crisis period.