Foreign exchange reserves grew by $2.4 billion from the previous week to touch a life-time high of $381.2 billion as on June 2, data from the Reserve Bank of India showed on Friday. Reserves have grown 5.8% since the beginning of the year, and have touched record levels four times since April, on the back of aggressive dollar buying by the RBI. Prior to June 2, reserves hit a record high of $379.3 billion as on May 19, an all-time high of $375.7 billion as on May 5 and a life-time high of $372.7 billion as on April 28. The central bank has been buying dollars on a daily basis, both in the spot market as well as in the forward market, to limit the appreciation of the local currency, which has been gaining steadily since the beginning of the year, traders said. “Their intention is to shore up the reserves as well as to prevent a sharp appreciation in the rupee. The exporters will panic and their competitiveness will dip if the rupee jumps suddenly. Obviously, the RBI does not want that to happen,” a foreign exchange trader with a private-sector bank said. Since the beginning of the year, the rupee has gained 5.9% against the dollar. On Friday,it closed at 64.24 against the dollar.Among other factors, strong demand for the local currency from foreign portfolio investors (FPIs) looking to invest in Indian assets has caused the rupee to appreciate. FPIs have bought Indian shares and bonds worth around $20.17 billion so far in 2017. Given India’s low current account and fiscal deficits, and the advantage it offers in terms of interest rate differential, traders expect the inflows to continue in the near-term. Foreign currency assets (FCAs), the largest component of the foreign exchange reserves, grew to $357.3 billion from $354.5 billion in the previous week, RBI data showed.
Expressed in US dollar terms, FCAs include the effects of appreciation/depreciation of non-US currencies, such as the euro, pound and the yen, held in the reserves. The central bank has always maintained that it does not want to influence the exchange rate for the rupee, but would take steps, including intervention in the spot market, to curb extreme volatility. According to the latest data available, the RBI bought $3.5 billion in the spot market on a net basis in March, while outstanding net forward sales stood at $10.8 billion during the month. The RBI publishes data on the sale and purchase of dollar with a lag of two months.