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  1. Forex reserves shrink by $2.4 bn to $360 bn

Forex reserves shrink by $2.4 bn to $360 bn

India’s forex reserves declined by $2.38 billion to $360.60 billion during the week to December 16, the Reserve Bank of India data released on Friday showed.

By: | Mumbai | Published: December 24, 2016 6:12 AM

India’s forex reserves declined by $2.38 billion to $360.60 billion during the week to December 16, the Reserve Bank of India data released on Friday showed. The decline was primarily due to outflow of foreign investor funds and depreciation in foreign currency assets as the Federal Reserve’s decision to hike rates by 25 basis points prompted a lot of investors to cut exposure to emerging markets.

The large amount of outflow meant that the Reserve Bank of India had to sell dollars to meet the demand for the greenback. In all, during the under review, foreign investors cut exposure to Indian debt and equity to the tune of close to $500 million.

The rupee, which had recouped some of its losses in the week ended December 9 to close at 67.41, depreciated by over 35 paise in the reviewed week, closing at 67.77 on December 16.

The fall in the rupee was primarily due to the dollar’s phenomenal rise, which started after Donald Trump’s victory in the US Presidential elections in November.

The greenback has since risen further, with the dollar index closing at 102.95 on December 16 after briefly crossing the 103 mark earlier that week, in no small part due to the Federal Reserve’s decision to hike rates.

“The rupee appeared to be fairly resilient when the FCNR (B) redemptions became due and was well managed by the RBI. The shock, however, has been administered in the form of the US elections where there is a perception that the new government would be more ‘closed’,” said CARE Ratings in a report on Friday.

CARE added that it is also expected that the Donald Trump government will be aggressive with fiscal stimulus to the economy, which, in turn. will raise the spectre of inflation, thus prompting the Fed to increase interest rates further.

The rupee’s fall also meant that the RBI’s foreign currency assets, a part of foreign exchange reserves, depreciated in the period under review. Foreign currency assets came in at $336.90 billion, down $2.35 billion from the end of the previous week, and this constituted the majority of decline in the overall forex reserves.

“It is not just FII outflow. If you see, the rate hike in the US would mean that the RBI-held US Treasury will also depreciate. And this could have led to a significant drop in overall reserves,” said Ajay Manglunia, head of fixed income at Edelweiss Securities.

The country’s gold reserves for the week under review came in at $19.982 billion, unchanged from the previous week.

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