India’s foreign exchange reserves have stabilised within the $360-$363 billion range, after hitting a record high of $364 billion in mid-June, says Radhika Rao Economist Group Research at DBS Bank. According to Rao, the total reserves (which amount to around 17% of the GSP) are comfortable on domestic metrics, particularly on import cover and adequacy to cover short-debt external debt levels. However, she cautions that the coverage falls short when compared to the total external debt position and as a percentage of GDP vis-à-vis regional counterparts.
Stating the Reserve Bank of India (RBI) has actively built reserves in the recent years to shield against volatility, Rao adds that authorities will actively beef-up the reserves stock by absorbing foreign inflows, which by extension also defends the rupee from sharp swings. “Authorities have been net dollar buyers in three of the first five months this year, absorbing short-term inflows and keeping rupee in sync with regional movements,” she says. “Net intervention purchases likely continued into July, as the Indian rupee shrugged post-Brexit jitters and strengthened past 67.00. In the third quarter of of 2016 yet far, the rupee is amongst the best performing currencies in the region, outdone by the Taiwan dollar and South Korean won. Renewed slump in oil prices and risk-off mood yesterday however saw the rupee trim gains,” she adds.
According to to Rao. the deployment pattern of the foreign currency assets shows that the central bank has prioritised liquidity in recent years. This is not surprising given the recent string of external volatile/risk events and lessons learnt from broad dislocations in wake of the global financial crisis back in 2008-2009, she feels.