While foreign fund flows into the country, via direct investments, have boosted dollar supply, imports have been slowing reining in demand for the greenback.
India’s forex reserves have crossed the half-a-trillion-dollar mark for the first time with the Reserve Bank of India (RBI) having bought more than $30 billion between mid-March and the first week of June. The country’s forex reserves stood at a record high of $501.70 billion as on June 5, an increase of $8.22 billion over the week before.
While foreign fund flows into the country, via direct investments, have boosted dollar supply, imports have been slowing reining in demand for the greenback. Moreover, some big-ticket equity transactions have also attracted foreign portfolio flows.
Experts observe that had the central bank not accumulated dollars, the rupee would have strengthened significantly. Ananth Narayan, professor-finance at SPJIMR, said that India’s current account will likely be in surplus this quarter, as a collapse in consumption through the lockdown has hit imports more than exports.
“In addition, prospects of FDI flows remain robust, with large deals being announced. These flows across the current account and FDI are making their way into RBI reserves now. In fact, if the RBI were not buying dollars, the rupee would have strengthened much more than the current levels,” Narayan said.
Economists at BofA pointed out the RBI is expected to buy forex at every opportunity. “In a sense, the RBI’s forex policy has reverted to the Jalan-Reddy policy of building high forex reserves to insure against contagion. Experience suggests that higher forex reserves paradoxically lead to higher FPI inflows by comforting investors. We estimate that the RBI should ‘conservatively’ build up $550 billion of forex reserves using various parameters. The import cover is now a high 13.8 months 1-year forward,” they wrote.
Manish Wadhawan , founder and managing partner at Serenity Macro Partners, said that over the last two months the RBI has been continuously shoring up forex reserves supported by the dollar inflows on account of transactions like Kotak QIP and RIL deals and also some reversal of FPI outflows.
“Despite the US dollar weakening against majors and the EM currencies, the rupee has remained relatively stable. The central bank has not let rupee appreciate beyond 75.50. In the backdrop of the recent sovereign downgrade by Moody’s, the RBI’s strategy of shoring up reserves seems to be an insurance from a macro point of view creating a war chest for the future in case the fundamentals get disturbed and also provide a stimulus to the domestic economy by not letting currency appreciate,” Wadhawan said.
Foreign currency assets (FCA), which form a key component of reserves, rose by $8.422 billion to $463.630 billion. FCAs are maintained in major currencies like the US dollar, euro, pound sterling and Japanese yen. Movement in the FCA occurs mainly on account of purchase or sale of foreign exchange by the RBI, income arising out of the deployment of foreign exchange reserves, external aid receipts of the government and revaluation of assets.