India’s forex reserves surge aided by RBI purchasing dollars

India’s forex reserves have surged 5.6 per cent over the past year to stand at $381.9 billion currently. But India is not the only country to witness a sharp increase in its reserves. Other emerging economies have also been witnessing a similar trend. With the dollar weakness leading to stronger emerging market currencies, most central banks appear to be intervening in the currency market.

India’s reserves had hit a nadir in September 2013 when the RBI’s efforts to protect a rapidly depreciating rupee had eroded the reserves to $274 billion. But once Raghuram Rajan took over the reins of the central bank, he tried to fortify reserves by curtailing the current account deficit, attracting NRI deposits and buying dollars. Forex reserves have risen 39 per cent since then.

Emerging markets add to reserves

The point to note is that the trend of surging reserves is observed not just in India, but in many other emerging economies as well. Countries such as Indonesia (21.7 per cent), Hong Kong (10.9 per cent), Thailand (5 per cent) and Brazil (3.7 per cent) were also able to increase their foreign exchange reserves over the past 12 months. The dollar’s sharp fall since the beginning of this year, as hopes of a sudden improvement in US economy under Trump waned, has made many of the currencies of emerging economies appreciate strongly. In a bid to keep the currencies competitive, these countries seem to have bought dollars, adding to their reserves.

The story has been different in China, where reserves have declined 4.3 per cent over the past 12 months. With the yuan now determined by market forces, the Chinese government is fast selling dollars in order to stem the fall in the Chinese currency.

RBI’s action

A look at the net dollar purchases every month by the Reserve Bank of India shows that the central bank has been making the most of rupee strength to accumulate reserves. Between January and April, it net purchased $4.88 billion. In March this year, as the rupee gained 2.84 per cent against the dollar, the central bank purchased $3.5 billion. In February too, as the rupee gained 1.76 per cent, the RBI bought $1.2 billion. It ' s obvious that the central bank is trying to keep the rupee from strengthening too much, while adding to the reserves.

Comfortable position

The addition to forex reserves in the past three years has placed the country in a comfortable position. Import cover is currently at a healthy 10 months. These reserves also provide adequate cover to external debt. Foreign exchange cover for external debt increased from 74.3 to 78.7 per cent between end-March 2016 and end-December 2016.

With export growth healthy over the last few months and foreign portfolio investors continuing to pump money in to the country’s stock and debt market, the reserves are likely to stay robust for some time.

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