India’s forex reserves rise over $7bn to record $351.87 bn in week ended 1 May

While the central bank had been building up reserves by absorbing excessive foreign currency inflows, the latest surge might be partly due to a change in value of reserves denominated in non-dollar currencies, said economists. Photo:AFP

Mumbai: India’s foreign exchange reserves shot up by more than $7 billion for the week ended 1 May, crossing $350 billion, data released by the Reserve Bank of India (RBI) on Friday showed. While the central bank had been building up reserves by absorbing excessive foreign currency inflows, the latest surge might be partly due to a change in value of reserves denominated in non-dollar currencies, said economists.

As on 1 May, India’s foreign exchange reserves were at a record-high level of $351.87 billion, rising $7.26 billion during the week. Foreign currency assets were up $6.89 billion while gold reserves rose $297.7 million.

The build-up in reserves has helped improve India’s import cover to more than eight months, from little under seven months in fiscal 2012-13. An import cover of 8-10 months is considered healthy by economists and it helps in maintaining a stable exchange rate environment.

Under governor Raghuram Rajan, RBI has been accumulating reserves to tackle any sudden outflows of capital and also as a way to stem any excessive appreciation in the currency.

The latest boost, however, could be more to do with a change in valuation. Between 24 April and 1 May, the week in question, the dollar fell against major global currencies like the euro, the British pound and the Swiss franc. The dollar index, which measures the currency’s strength against major global currencies, fell to 94.60 on 30 April from 96.922 on 24 April. This would have pushed up the value of non-dollar reserves.

India’s reserves consist of a diversified set of foreign currency assets, gold, International Monetary Fund’s (IMF) special drawing rights or SDRs, and a reserve position

in the IMF.

Analysts estimate that roughly 40% of the foreign currency assets are in dollars, 30% in euro, 10% in yen and pound sterling and the balance in other currencies.

Since the reserve position is expressed in dollars, a change in value of any of the other major currencies against the dollar reflects in the overall reserve position.

“We estimate that about half of the increase might be due to valuation changes with the dollar weakening. The rest might be due to a combination of intervention to absorb funds inflows, both current and capital, and interest earnings on RBI forex reserves,” said Saugata Bhattacharya, chief economist with Axis Bank Ltd.

Japan’s Daiichi Sankyo Co. Ltd sold shares worth $3.6 billion in Sun Pharmaceutical Industries Ltd, which was lapped up by foreign investors on 21 April. The resultant dollar inflow strengthened the local currency and the central bank intervened in the market for a few days to cool off the local currency. The Indian rupee was at 63.5625 a dollar on 24 April and closed April at 63.4225 a dollar. The rupee had strengthened to 62.83 a dollar following the deal, when RBI intervened and continued to buy dollars for some more days. The central bank releases data on currency intervention with a one-month lag.

The build-up in reserves is seen as a positive for the currency as it gives the central bank room to intervene in the foreign markets to stem volatility in the event of any sudden outflows of capital.

The Indian rupee closed at a 20-month low of 64.24 a dollar on Thursday. On Friday, the exchange rate strengthened and the rupee closed at 63.94 a dollar. The rupee was under pressure this week as foreign investors sold in the equity markets. In the debt markets, too, foreign investors sold over $900 million cumulatively on 6 and 7 May.

Source: www.livemint.com

Category: Forex

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