Foreign exchange reserves hit a record high for the third time since April to touch $379.3 billion as on May 19, data published by the Reserve Bank of India on Friday showed. Since the beginning of the year, reserves have increased by 5.3%. The previous all-time high of $375.7 billion was as on May 5. On April 28, reserves were at $372.7 billion, the highest since September 9, 2016, according to RBI data.
Traders have largely attributed the increase in foreign exchange reserves to the RBI’s dollar purchases. The central bank has been buying dollars, both in the spot market as well as in the forward market, to limit the appreciation of the rupee, which has been gaining steadily since the beginning of the year.
“The RBI has been buying in tranches at regular intervals. This week, it has bought close to $2 billion in the spot market,” a senior trader with a foreign bank said on condition of anonymity because he is not authorised to speak to the media.
Since the beginning of the year, the rupee has gained 5.1%. 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 equity and bonds worth around $18 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 near term.
Foreign currency assets (FCAs), the largest component of the foreign exchange reserves, grew to $355.1 billion from $351.1 billion in the previous week, the 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 any 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.