RBI needs to buy $80b by Mar '16 to keep 8 months import cover

The Reserve Bank will have to buy forex reserves to the tune of USD 80 billion by March 2016 if it were to at least maintain the current eight months' import cover, says the US brokerage Bank of America-Merrill Lynch.
According to the latest RBI data, forex reserves stood at USD 309.41 billion for the week ended April 18, which can cover about eight months of imports.
As per this report, since March this year, the reserves have risen by USD 12 billion.
"We expect the Reserve Bank to recoup the USD 70 billion of forex it sold (excluding concessional/oil swaps) since end-2008 at the earliest.

"Since the balance of payment indicators are now trailing behind other BRICs, we expect RBI to buy USD 33.9 billion, including forex swaps with oil firms in FY15 and USD 41.7 billion in FY16, if oil stabilises at USD 105 a barrel levels," Bank of America-Merrill Lynch India economist Indranil Sengupta said in a research note.
Including the dollars swaps, the RBI has to buy back at least USD 80 billion before March 2016, he added.

It can be noted that between September 2011 and May 2013, the forex reserves fell by a whopping USD 31.6 billion, and since May 2013 and December it lost USD 9.3 billion but by December 2013 it rose by USD 2.3 billion and since March this year, it rose by over USD 12 billion, including the forex swaps with oil companies.

Sengupta further said a stable government after the ongoing polls will also likely raise USD 20-25 billion by listing the G-Secs in a benchmark emerging market bond index and another alternative could be to raise USD 5 billion a year of sovereign bonds like Brazil or Russia.
"It is not as if the forex market will wait for RBI to buy the entire USD 80 billion. All it is looking for is a confirmation that the RBI has returned to the Jalan-Reddy policy of building forex reserves to guard against contagion," Sengupta said.
Stating that an 8-10 month import cover is a must for the rupee stability, Sengupta noted that FII investment in equities has risen to 80 per cent of forex reserves now from under 30 per cent in 1997, which will strengthen the rupee on one hand but can also weaken it if they withdraw heavily.