Strengthening dollar, commodity prices push foreign reserves down

Rallying dollar, crude and commodity prices coupled with a sharp decline in Euro led to a drastic fall in India's foreign exchange reserves after four successive weeks of gains.

According to data furnished by the Reserve Bank of India (RBI) in its weekly statistical supplement, India's total foreign exchange reserves fell by $2.31 billion to $351.55 billion for the week ended May 22, 2015.

The country's total foreign exchange reserves had touched a new record high of $353.87 billion for the week ended May 15 having increased by $1.74 billion over the figure for the previous week.

For the week ended May 8, the reserves stood at $352.13 billion having grown by $262.4 million over the previous week. In the week before that (May 1) they stood at $351.86 billion following a sharp $7.26 billion increase from the earlier week.

Foreign exchange reserves have increased by close to $30 billion since January as overseas investors buoyed by the hope of economic revival poured in dollars in the local debt and equities market.

"The major decline is due to the dollar rallying and other major currencies like Euro falling. The strengthening dollar led to a fall in value of non-dollar currencies and gold value," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities told IANS.

"The Greece crisis and anxiety about the country's ability to repay its dues to the International Monetary Fund (IMF) weakened Euro greatly," Banerjee said.

The Indian reserves constitute nearly 25-30 percent non-dollar currencies.

According to Banerjee, it is also assumed that the RBI has been selling dollars to stabilise the rupee value in the forward trading markets since the last few weeks.

"The RBI is selling dollars, whenever the rupee crosses the Rs.64 level mark and buying when it falls below Rs.63. This is a short range. However, the RBI seems to be comfortable with the rupee ranging anywhere between Rs.62 and 64," Banerjee said.

He also pointed out that the new financial reality of a weak rupee, unstable stock markets, rallying commodity prices and strengthening dollar is here to stay for some time.

"Till last year we had a situation where the rupee was stable, dollar was declining -- so was crude oil -- and the stock markets were booming. Now the reality has changed drastically," he said.

During the last several weeks, the rupee value was also impacted by the significant pull-back of foreign funds due to the minimum alternate tax (MAT) issue.

The MAT on capital gains is expected to impact the margins of foreign funds.

Some estimates point out that the RBI may have sold nearly $5-$10 billion in the forward trading markets to arrest the slide in the rupee value which currently stood at Rs.63.73 per dollar.

The decline in the week under review will not deter RBI which is continuing to build up its reserves to counter any future financial shocks and slide in rupee value like the one which was witnessed in 2008 and June 2013.

"Apart from dealing with any future financial shocks like the one which was earlier triggered by the US Fed's announcement of tapering, the healthy state of reserves has acted as a support to the Indian rupee's value," Banerjee added.

The RBI is cautious about the US Fed's stand that the rate hike might take place in the later part of the year.

With higher interest rates in the US, the foreign portfolio investors (FPIs) are expected to be led away from the emerging markets such as India.

Meanwhile, the foreign currency assets (FCAs) which form the largest component of the forex reserves decreased by $2.28 billion and stood at $326.83 billion in the week under review.

The country's gold reserves remained stagnant at $19.33 billion. The reserves had augmented by $297.7 million during the week ended May 1.

However, the special drawing rights (SDRs) were down by $26.1 million to $4.06 billion.

The country's reserve position with the International Monetary Fund (IMF) receded by 8.5 million to $1.31 billion during the week under review.