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Forex reserves may hit $400-bn record high by September: Morgan Stanley

Robust capital inflows and weak credit offtake cited as reasons behind growth in reserves

Press Trust of India  |  New Delhi 

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India's forex reserves are expected to hit $400 billion by September, driven by robust capital inflows and weak credit offtake, says a report.

According to the global financial services major, are at an all-time high and have risen at the fastest pace since 2015.

As of August 4, forex reserves hit a record high of $393 billion.

"If the pace of forex reserves is similar to that of the past four weeks, forex reserves would hit $400 billion by September 8, 2017," said in a research note, adding "the gain in India's forex reserves has been one of the strongest within the Asia, ex-Japan region, in the past 12 months".

attributed two major reasons for the rise in forex reserves -- robust capital inflows and weak

"Foreign direct and institutional flows remain robust, tracking at $63 billion and $17 billion on a 12-month trailing sum basis. This robust inflow coupled with weak has meant interbank liquidity remains in strong surplus mode of $42 billion," Morgan Stanley said.

The report, however, noted that as capital flows remained buoyant, it would put appreciation pressures on the and could lead to excess liquidity, which in turn would create challenges for the to manage its monetary policy.

But, is not likely to cut policy rates and lower real rates to prevent further currency appreciation, as the central bank is following a flexible inflation targeting regime, the report said.

"Hence, monetary policy will only take into account the impact of currency appreciation on inflation into its policy decision, rather than tackling currency appreciation per se," Morgan Stanley said.

The RBI has already intervened in the currency markets in both spot and forward market to the tune of $3 billion and $17 billion, respectively, as of June 2017.

The report noted that as the excess liquidity challenge looks set to persist, the RBI will need more tools to manage excess liquidity.

First Published: Sun, August 20 2017. 12:12 IST