India’s foreign exchange reserves topped $322 billion to hit a record high as of January 16 as the Reserve Bank of India aggressively bought dollars to boost the forex kitty to cushion against possible outflows once the US Federal Reserve starts tightening monetary policy.
Reserves rose by $2.7 billion in the week ended January 16 to $322.14 billion, RBI data showed. At this level, reserves were up by $30 billion or roughly 10% year-on-year. This rise is mainly due to the RBI’s massive dollar purchases from the foreign exchange market over the year.
With a high dollar stockpile, the reserves provide around eight weeks of import cover and will also act as an effective cushion against outflows. Most market participants are predicting an interest rate hike by the US Fed as early as June and this could trigger a secular outflow of dollars from emerging markets.
In its financial stability report in December, RBI had pointed out the risk of such outflows. Bank of America- Merrill Lynch in a December report had said the RBI would defend the rupee around 65/$ and can afford to sell $15 billion from its reserves, should outflows occur.
The RBI had largely been a net buyer of dollars in 2014, both in the spot and forward markets. In all, the RBI has bought a massive $75 billion from the market in April-November period. The strong dollar inflows, predominantly into the bond market, have helped RBI to boost reserves.
Foreign institutional investors poured in a record $26.4 billion into Indian bonds and another $16 billion into shares in 2014. So far in January, inflows into debt have been $2.5 billion while the equity market has seen around $890 million.
Bankers say the RBI has kept the rupee from appreciating sharply by absorbing over 90% of the debt flows. The rupee had moved in a tight band of 60-63/$ in 2014 and has remained largely stable so far in January as well.
Most bankers expect the dollar flows to continue as a stable government and attractive interest rates juxtaposed with a stable currency continue to lure foreign investors. With the central bank expected to keep the rupee stable, its dollar purchases could well continue in case the momentum of inflows sustains.