Over the three-month period that the RBI offered discounted swap rates to banks for raising foreign currency deposits and overseas capital, reserves have surged by $16.5 billion. As on November 29, forex reserves stood at $291.30 billion, up from $274.81 billion on September 6.
Reserves have been depleting since May when the rupee started sliding due to fears of a tightening in global liquidity conditions, forcing the RBI to intervene by selling dollars in the market and also providing foreign exchange directly to oil importers. This, in turn, raised fears of India's forex reserve cover depleting and further added to the rupee weakness.
In response, the RBI announced two concessional swap facilities on September 4, under which banks can swap dollars raised through foreign currency non-resident (FCNR) deposits and overseas borrowings with the RBI.
The two swap windows garnered a total $34 billion for the RBI. However, nearly half of the dollar flow or $17.5 billion seems to have been supplied to oil companies by the central bank through a separate swap window.
Economists believe following the RBI's measures, the country's reserve position is much stronger when compared to other emerging market (EM) economies which also have large current account deficits.
Compared to some of the other EMs, India could consolidate its position better in the last three months with a rapid lowering of the current account deficit and sizeable inflows under the FCNR deposit scheme, leading to a strengthening of the currency, said Siddharth Sanyal, chief India economist at Barclays Capital.
Among the EM economies, Indonesia, Brazil, Turkey, South Africa and India were said to be in a weak spot with regards to their low level of forex reserves, high current account deficit and weak economic growth. Morgan Stanley had dubbed these economies as the 'fragile five' in one of its recent reports.
During April-September, the rupee had tumbled 13% and had hit an all-time low of 68.85/$ in August. The Indonesian rupiah had declined 14.6%, the Turkish lira had fallen 10.3%, the Brazilian real had slipped 8.8% and South African rand had fallen 7.8%.
While the challenges still remain, India is clearly in a much stronger footing now compared to the same in May-June when the talk of US taper began, said Sanyal.
While the accretion to reserves is not a gamechanger, it certainly gives the country more firepower to deal with a tapering of the US Federal Reserve's quantitative easing programme, expected to begin next year.
Over the last two months, the rupee has risen by 1.3% and has gained 12% from its all-time low. In contrast, the rupiah, lira, real and rand have fallen by 1.5-5.0% over the same period.
While the much-needed buffer in terms of reserves generated from the swap window gives a breather to the country, the risk of outflows and as a result a drawdown on reserves remain high, say analysts. During July-September, foreign fund outflows resulted in a draw-down of $10 billion from the forex reserves.
We have bought time. What we need to do now is strengthen our economy and boost growth, said DK Joshi, chief economist at Crisil.