Reserves up despite RBI $ sales

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The country’s foreign exchange reserves went up by $650 million to $289.5 billion for the week ended September 12. The reserves with the Reserve Bank of India climbed despite a 3.29% dip in the rupee’s value against the dollar, repeated RBI interventions and selling by foreign institutional investors in the stock market. Foreign-currency assets climbed $676 million to $280.3 billion during the week, RBI said in its weekly statistical supplement on Friday.

India’s foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $57.3 billion in the past year.The rupee slipped to 45.77 at the end of the week from 44.26, though it is now at 46.32.

Analysts are surprised that the reserves had gone up, since last week too was tumultuous, with foreign institutional investors making a net withdrawal from the Indian markets. By the end of the last week, they had pulled out $852 million from the country. The outflow has since increased, rising to $1.154 billion this week, prompting RBI to relax measures to pull in foreign exchange into the country, in tandem with other central banks of the world.

Acknowledging the storm clouds, finance minister P Chidambaram briefed the Cabinet about the developments in the world financial markets on Friday. Ministers told the media that Prime Minister Manmohan Singh has asked Cabinet ministers to stay alert about the unfolding situation.

Planning Commission deputy chairman Montek Singh Ahluwalia later told reporters, “We have not been as exposed to these new and innovative instruments, which have been the source of financial distress internationally. So, I do not think that direct impact on the Indian financial system is going to be significant at all.”

According to Ahluwalia, the Indian financial system is quite stable although there will be an indirect effect. “If the rest of the world gets disturbed and capital flows and liquidity shrink, there is bound to be spillovers not just on India but all over the world. India is fortunate to have large foreign exchange reserves, and hence, it would be able to tide over any short-term disruption in capital inflows.”