Weakening dollar adds strength to India's forex reserves

A weakening dollar, coupled with a rise in rupee value and hopes of a normal monsoon, surged India's foreign exchange reserves by $1.57 billion in the week ended June 12.

Data furnished by the Reserve Bank of India (RBI) in its weekly statistical supplement, showed that India's foreign exchange reserves grew by $1.57 billion and stood at $354.28 billion.

The reserves had grown by only $239.4 million and stood at $352.71 billion in the week before (June 5).

Foreign exchange reserves have increased by close to $35 billion since January as overseas investors, buoyed by the hope of economic revival, poured in dollars in the local debt and equities markets.

"The rise in the reserves is due to a number of reasons. Depreciation in dollar which translated into a rise in non-dollar currencies and gold value," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities told IANS.

"Another reason is the smart investments moves by the country's apex bank. The RBI is pretty active in the forward purchase markets since the last 18-23 months," Banerjee said.

The RBI is selling dollars, whenever the rupee crosses the Rs.64 level mark and buying when it falls below Rs.63. Though at a very short range, experts believe that the RBI seems to be comfortable with the rupee ranging anywhere between Rs.62-Rs.64 per dollar.

Other key reason for the gains is the fact that foreign investors have been bullish after the US Fed's decision not to increase interest rates.

The growing strength of monsoon and the weakness in Chinese shares are also seen as positive factors for inflows into India.

Dollars were added into the reserves, thanks to the speculation that the RBI might raise the buying limit for rupee denominated government bonds, cited Banerjee.

"The bonds were earlier pegged at Rs.47 to a dollar. Now the talks is to to peg it at Rs.64 per dollar. This will instantly add $5-6 billion in the bond value. Though the dollar buying limit of the bonds will remain the same at $30 billion," Banerjee said.

Major triggers to look out for the forex markets will be the outcome of the 6-year running Greece debt crises. Any news of a bail out might send positive signals to the global economy. Whereas a stalemate might lead to an outflow of funds from the foreign investors.

Meanwhile, the RBI continues 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 will also act 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 FPIs (Foreign Portfolio Investors) are expected to be led away from the emerging markets such as India.

During the week under review the foreign currency assets (FCAs) which forms the largest component of the forex reserves rose by $1.56 billion and stood at $329.58 billion.

The country's gold reserves which were stagnant at $19.34 billion. The bullion has remained at these levels since the week ended May 1, when it grew by $4.5 billion.

The special drawing rights (SDRs) were up by $4.2 million to $4.05 billion. The country's reserve position with the International Monetary Fund (IMF) grew by $1.4 million to $1.31 billion.