Tag: foreign exchange

Forex reserves cross $600 billion for first time on foreign flows, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: The country’s forex reserves crossed the $600-billion mark for the first time on the back of continued foreign investment flow into the capital markets. According to the RBI, forex reserves increased by $6.8 billion in the week ended June 4 to $605 billion.

The current level of forex reserves is enough to cover nearly 16 months of imports. According to RBI governor Shaktikanta Das, the central bank has enough ammunition to meet challenges arising out of “global spillovers”, a reference to any sudden policy changes in the US or geopolitical shifts that could lead to funds exiting India.

India is now less than $200 million behind Russia, which has an almost identical level of reserves. The pile-up of foreign exchange reserves is an outcome of the RBI’s strategy of buying dollars when there is a sudden spurt of inflows, which causes volatility in the forex markets.

In FY20, the RBI added over $100 billion to the reserves. It has also sold dollars when the rupee came under pressure. In February and March, the central bank had depleted its stockpile by almost $10 billion by selling dollars.
Foreign fund buying of shares and debt in India also added to the reserves. According to the data from CDSL, in FY21, net inflows of about $37 billion came in through these routes and while another $400 million net flows were added to it.

According to a report by Brickworks Ratings, the exchange rate volatility demands more forex interventions by the RBI. Hence, the accumulation of forex reserves helps the RBI to maintain the exchange rate at a comfortable level.

The report points out that doubts over India’s economic recovery led to significant capital outflows in April and May. The RBI’s purchase of dollars also has a corollary impact on rupee liquidity. Every $1 billion that the RBI purchases results in around Rs 7,300 crore of rupee funds being released.



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‘Forex reserves may have crossed $600-billion mark’

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Our Bureau

India’s foreign exchange (FX) reserves may have vaulted over the $600 billion milestone in the week ended June 4, 2021.

The reserves jumped by $5.271 billion in the week ended May 28, 2021 to stand at $598.2 billion, as per the Reserve Bank of India’s latest weekly statistical supplement.

RBI Governor Shaktikanta Das underscored that emerging market economies have to build up their own buffers and India is no exception.

Das said: “After a risk-off period of retrenchment in April-May, the prospects for capital flows to India are improving again. While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance.”

Das observed that this has necessitated countervailing two-sided interventions by the central bank in spot, forward and futures markets to stabilise financial market and liquidity conditions so that monetary policy retains its domestic orientation and the independence to pursue national objectives.

Spike in forward premia

Thus, RBI actively engages in both purchases and sales in the foreign exchange market and its various segments.

“The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers. In the process, strength is imparted to the country’s balance sheet by the accumulation of reserves,” Das emphasised.

To a question on why forward premia spiked earlier and in the last three days came crashing down, Michael D Patra, Deputy Governor, said the forward premia are essentially a market outcome.

“Last time when the forward premia spiked, it was because of foreign investment in an InvIT (Infrastructure Investment Trust)….So, we watch these outcomes and stand ready to take countervailing action….as and when necessary,” Patra said.

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India added 42.3 tonnes gold to its reserves in FY21

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India’s gold reserves went up by 42.3 tonnes in the one-year period ended March 31, 2021, against 40.45 tonnes in the year-ago period.

As at end-March 2021, the Reserve Bank held 695.31 tonnes of gold as part of its foreign exchange reserves management against 653.01 tonnes as at March-end 2020, as per the central bank’s “Half Yearly Report on Management of Foreign Exchange (Fx) Reserves.”

During the half year period (October 2020 – March 2021) under review, India’s Fx reserves increased from $544.69 billion as at end-September 2020 to $576.98 billion as at end-March 2021.

In value terms (US Dollar), the share of gold in the total Fx reserves decreased from about 6.69 per cent as at end-September 2020 to about 5.87 per cent as at end-March 2021, the report said.

As at March-end 2021, while 403.01 tonnes of gold (360.71 tonnes as at March-end 2020) was held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), 292.30 tonnes of gold (unchanged from March-end 2020) was held domestically, RBI said.

At the end of December 2020, the foreign exchange reserves cover of imports increased to 18.6 months from 17.1 months at end-September 2020, the report said.

As per the report, the ratio of short-term debt (original maturity) to reserves, which was 18.9 per cent at end-September 2020, declined to 17.7 per cent at end-December 2020.

Further, the ratio of volatile capital flows (including cumulative portfolio inflows and outstanding short-term debt) to reserves declined from 68.0 per cent at end-September 2020 to 67.0 per cent at end-December 2020.

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