Foreign exchange reserves now at all-time high

The reserves rise $2.67 bn for the week ending Jan 16 to $322.14 bn

The Reserve Bank of India's (RBI) foreign exchange reserves rose to an all-time high in the week ended January 16.

The central bank has kept mopping dollar flows into India, so as to protect against the outflows which are expected when the US Federal Reserve begins raising its interest rates later this year.

Data issued on Friday  showed the forex reserves rose $2.67 billion for the week ended January 16 to $322.1 bn. Foreign currency assets rose $2.7 bn to $297.5 bn.

“Given that commodities and especially oil prices are at where they are, we expect the current account deficit (CAD) to be much lower this year. We expect the balance of payments to be positive, as high as a $50-bn surplus for this calendar year and, therefore, the accretion of reserves ought to continue,” said Ananth Narayan, regional head, financial markets, Standard Chartered Bank.

Gold reserves rose $392.7 mn during the week to $19.4 bn. Special Drawing Rights fell by $19.3 mn to $4.11 bn, while India's reserve position with the International Monetary Fund was down $5.2 million to $1.12 billion.

The previous high for forex reserves was in the week ending September 2, 2011, at $320.79 bn.

A sharp rise in gold imports and a fall in export growth pushed the CAD to $10.1 bn (2.1 per cent of gross domestic product) in the financial year's second quarter, ending September, compared to $5.2 billion (1.2 per cent of GDP) for July-September 2013.

The deficit was $7.8 billion (1.7 per cent of GDP) in the first quarter ended June, according to RBI data.  On Thursday, the European Central Bank announced an asset purchase plan of ^60 bn a month. This will help to boost RBI's forex reserve, as India is an attractive market among the BRICS economies and has been seeing foreign inflows in both debt and equities.

According to Bloomberg, this country’s reserves rose the fastest among the BRIC nations in the past 12 months. India’s increased about 10 per cent in this period, Brazil’s fell by 0.4 per cent to $374 bn and in Russia they fell 28 per cent to $339 bn. China’s reserves rose 0.6 per cent to $3.8 trillion.

“We continue to expect RBI governor Raghuram Rajan to recoup foreign exchange to fight possible contagion when the US Fed raises rates in September. Needless to say, we fully share his concerns about competitive monetary easing by central banks. If it consistently buys foreign exchange, our forecast is that RBI can reach 10 months import cover by March 2016, well above the critical eight-month cover needed for rupee stability,” said Indranil Sen Gupta and Abhishek Gupta at Bank of America Merrill Lynch, in a note to clients on Friday.

Till October 2014, even the US Fed was pumping liquidity through its bond-buying programme. That had supported foreign flows in domestic markets, which RBI was mopping through state-run banks.

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

RBI's forex reserves had hit a 39-month low to $274.81 bn on September 6, 2013. Since then, backed by several steps to boost inflows, these have been rising.

Among the various measures taken were introduction of a dollar-rupee swap window for fresh Foreign Currency Non-Resident Account (Banks) deposits, or FCNR (B) dollar funds, with effect from September 10, 2013.

In that month, RBI had also set up a swap window for banks, to borrow up to 100 per cent of their Tier-I capital from abroad.

On Friday, the rupee ended at a two-month high of 61.44 a dollar. Since the start of 2015, it has already risen 2.5 per cent. Most of this is because of bullish equities.

However, since the start of this financial year (April 1, 2014), the rupee has fallen by 2.6 per cent. Most of this depreciation is because the central bank kept intervening in the market to mop dollar flows.

S&P BSE Sensex registered its sharpest seven–day rally in the last five-and-half years to gain over 1,900 points, or 7 per cent, on Friday after last week's surprise interest rate cut by the Reserve Bank of India, followed by a better-than-expected quantitative easing (QE) programme announcement by European Central Bank (ECB) president Mario Draghi on Thursday. Bullish equities attracted foreign flows which helped the rupee.