India’s 1st line of defence: RBI’s $424 bn forex war chest to shield country from global uncertainties

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Published: April 30, 2018 4:52:19 PM

India's foreign exchange reserves may have fallen from a lifetime high to USD 423.582 billion in the week to April 20, they can still be the first line of defence against global uncertainties.

India's 1st line of defence: RBI's 4 bn forex war chest to shield country from global uncertaintiesIndia and Indonesia have bigger reserves war-chests.

India’s foreign exchange reserves may have fallen from a lifetime high to USD 423.582 billion in the week to April 20, they can still be the first line of defence against global uncertainties such as the rise in US bond yields, Singapore-based DBS group said in a note. “With US 10Y interest rates testing the crucial 3% mark and the US dollar bulls out of a stupor, India and Indonesia are back in defensive mode. Compared to the depths of the taper tantrum months, both economies have bigger reserves war-chests,” Radhika Rao, Economist DBS, said.

Last Wednesday when 10-year US Treasury yields breached the 3% mark, nervousness gripped the Indian market –BSE Sensex declined 0.3%, Nifty50 slumped 0.4%, and India sovereign bond yields rose to 7.74% from 7.68%. “With a higher reserves buffer, the first line of defense for both the economies will be to step up intervention in the spot and forwards, with an eye on prevalent liquidity conditions,” Radhika Rao added.

India’s forex reserves had crossed the USD 400-billion mark for the first time in the week to September 8, 2017, but has since been fluctuating; but have majorly remained above the mark. This signals the “cushion” that is in place to deal with any potential tightening of external funding. “India and Indonesia, which were hurt by the last dollar rally episode, are not out of the woods this time either,” she added.

While forex war chest provides the first line of defence, there are some caveats too: There is an improvement in reserves base, but the funding cover has improved only marginally. “There are limitations on the quantum of intervention, especially if US yields stay high and US dollar strength shows little signs of abating. This keeps policy tightening risks on the table.”

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