India’s foreign exchange reserves crossed $500 billion for the first time as the Reserve Bank of India builds up a war chest even as the rupee has been the worst performer among emerging market currencies since the COVID-19 outbreak was declared a pandemic in March.
The latest data from the RBI showed that India’s forex reserves surged by $8.2 billion during the week ended June 5 — the biggest weekly jump since September 2007 — to $500.02 billion. The increase in reserves was mainly due to a rise in foreign currency assets, which increased by $8.4 billion in the week.
Currency dealers said the sharp increase was due to gains from both currency revaluation (as the dollar depreciated against major currencies) and dollar mop-up through intervention by the central bank. India now has reserves to meet an import cover of about 14 months.
So far in 2020, foreign exchange reserves have climbed by $40 billion even as the rupee fell 6% in the same period, indicating that the RBI has not been aggressive in intervening in the currency market to stem the Indian currency’s fall.
Dealers said India was one of the highest recipients of foreign currency inflows this month, which was being used by the central bank to boost its war chest during uncertain times.
“We grow more confident of our standing call of the RBI buying forex (FX) at every opportunity to guard against contagion,” economists at BofA Securities wrote in a note to clients.
Forex spurs FPIs
“The RBI’s FX policy has reverted to the Jalan-Reddy policy of building high FX reserves to insure against contagion. Experience suggests that higher FX reserves paradoxically lead to higher FPI inflows by comforting investors. We estimate the RBI should ‘conservatively’ build up $550 bn” of reserves, the economists wrote.
Published - June 12, 2020 10:26 pm IST
