At a time when the rupee is steadily weakening, the foreign exchange reserves rose by $7.3 billion last week — the biggest weekly jump since October 2008 — to hit a fresh all-time high, data from RBI showed.
Foreign exchange assets, considered a loose gauge of RBI’s interventions in the forex market, rose by $6.89 billion last week. Reserves were at an outstanding $351.89 billion as of May 1, up $40 billion a year ago.
However, the jump in reserves last week could be partly attributed to valuation gains as these are invested by RBI in securities denominated in various currencies. Also, according to market participants the central bank may have taken delivery of forward dollar contracts entered earlier, resulting in a boost to reserves.
RBI’s outstanding position in the forward market was $5.8 billion as of February end. The RBI details its forex interventions with a lag of two months.
Since the rupee has been weakening steadily over the last two weeks, the central bank is unlikely to have bought dollars from the market. During the week ended May 1, the rupee had been stuck in a narrow 63.15-63.45/$ band and dollar inflows into equity and debt had been only about $100 million.
On Friday, the rupee ended at 63.94/$ and some currency dealers said the RBI sold dollars on Thursday to prevent a sharp fall of the rupee after the currency breached 64/$ level.
Even at the level of around 64/$, the rupee is overvalued by around 10% in terms of real effective exchange rate (REER) which could prompt the RBI to allow the currency to depreciate. The 36-currency REER of the RBI puts overvaluation at 13% in March.
RBI governor Raghuram Rajan had reiterated that the central bank intervenes only to curb volatility in the rupee and not with a goal of increasing the reserves. In 2014, the central bank had been aggressively mopping up dollars to curb the rupee appreciation which has resulted in a big accretion to reserves. Dollar inflows into bonds was a record $26 billion in 2014 but flows have slowed down since April.