Foreign exchange reserves rose for the fourth straight week to hit a new record high of $330 billion as of February 6, data from the Reserve Bank of India showed.
Forex reserves rose by $2.12 billion in the week ended February 6 and were up $37.88 billion year-on-year. Forex reserves have been steadily rising over the last one year on the back of aggressive dollar purchases by the RBI from the market.
The central bank bought a massive $29.2 billion from the spot dollar/rupee market between April and December 2014 and, along with purchases in the forwards market, the total buying was around $75 billion.
Ever since large outflows from the local bond market dragged the rupee to an all-time low of 68.85/$ in August 2013 and drove up bond yields by 100 bps, the central bank has been cautiously building reserves. Dollar inflows into bonds is considered as ‘hot money’ or short-term flows that tend to be fickle and could quickly reverse.
While the RBI has maintained that it intervenes only to curb volatility in the forex market and not specifically to shore up reserves, the time to buy dollars has never been more conducive for the central bank.
Foreign institutional investors have poured a net $32 billion into Indian bonds during April-December and have invested another $4.5 billion so far in 2015.
The RBI has mopped up almost all the dollar flows into the bond market since April, thereby shoring up reserves and also keeping the currency stable.
The rupee closed at 62.20/$ on Friday and has remained in a narrow 61-63/$ band over the last six months.