RBI seen shoring up forex kitty to ward of Fed taper impacts

Even though forex reserves have touched all-time highs, RBI will continue to accumulate the same as it needs resources to fight another round of pressure on the rupee that may come with the Fed rate hike and also a surge in imports with the economic recovery, BofAML has said.

In the last episode of pressure on the rupee in what was called as 'taper tantrums' of May 2013, USD 20 billion of reserves were lost to defend the rupee, Bank of America Merill Lynch said, adding that the economic recovery will also push up imports, which will put further pressure on the currency.

The US Fed has indicated that it will start hiking rates as early as September or as late as December.

The continuously rising jobs data, which slipped to a 40 year low of 5.3 per cent earlier this month, has further strengthened the Fed's resolve to end the near zero rates that were in force since 2008.

The report said RBI needs to set aside USD 20 billion for each of the two shocks, and pointed out to a shortfall in the reserves if we continue with the policy of maintaining eight-months import cover in the forex kitty.

"At present, we estimate that the RBI can sell about USD 20 billion (from USD 15 billion earlier) to defend the rupee at 65 levels against the US dollar before hitting the 8-month import cover on a March 2016 basis -- estimated at USD 315 billion -- below which the rupee typically depreciates," it added.

The brokerage said even though the RBI said the reserves stood at USD 353 billion in its latest finding, it estimates the "actual" reserves to be USD 340 billion itself.

"This implies that the RBI is actually short by about USD 15 billion," it said, adding that hence the central bank will continue to but foreign exchange.

The "actual" reserves have been arrived after netting off various factors like adding outstanding forwards, and deducting over brought, working nostro balances, FCNRB and oil payments to Iran which are facilitated by RBI, it said.

Data released yesterday said the Reserve Bank remained net purchaser of the US currency in June, buying USD 565 million from the spot market. In FY15, RBI had net purchased USD 54.837 billion.

The brokerage also said the rise in portfolio flows into the country is raising our vulnerability to a contagion.