India FX reserves at record high as RBI fortifies defences

By Suvashree Choudhury

MUMBAI (Reuters) - India's foreign exchange reserves rose $2.7 billion last week to reach a record high as the Reserve Bank of India continued to buy U.S. dollars in a bid to shore up its defences against any potential volatility in global currency markets.

India's reserves reached $322.14 billion in the week ending on Jan. 16, according to data published by the Reserve Bank of India on Friday, surpassing a previous high of $320.785 billion in September 2011.

Surging reserves come as foreign investors have continued to be hefty buyers of bonds and shares because of expectations for economic reforms from Prime Minister Narendra Modi's government and the central bank's success in reducing inflation.

The RBI has been keen to build up its defences after the country suffered in 2013 the worst rupee turmoil since a balance of payment crisis a decade ago because of dwindling reserves and a high current account deficit.

"It looks like FX reserves have gone up due to RBI buying dollars in the market," said A Prasanna, economist at ICICI Securities Primary Dealership Ltd.

Analysts estimate currency reserves now provide more than nine months import cover, well above the around 6 months of cover in 2013.

The European Central Bank's massive bond stimulus programme unveiled on Thursday could further spur more foreign flows into emerging markets such as India this year, although that could eventually be curtailed should the U.S. Federal Reserve raise interest rates, analysts said.

Bank of America-Merrill Lynch on Friday estimated India could attract $25 billion in portfolio equity flows from the ECB action, despite Fed tightening.

Besides building up reserves, RBI has also sharply improved the current account deficit and last week unexpectedly cut interest rates after a recent sharp fall in inflation.

As a result, the rupee has been the best performer in Asia so far in 2015, rising by around 2.6 percent.

(Editing by Rafael Nam)