India’s reserves have fallen by $1.68 billion to $350.36 billion for the week ended January 1 as the Reserve Bank of India (RBI) sold dollars to defend the rupee from falling. This is the second time in a fortnight that the forex reserves have fallen.
For the week ended December 18, 2015, the forex fell by $1.40 billion to $351.10 billion from the preceding week. They rose to $352.04 for the week ended December 25, 2016, before falling again, proving that Reserve Bank of India (RBI) is buying and selling dollar to maintain a stable band for the rupee.
NS Venkatesh, executive director and chief financial officer, IDBI Bank, said, “RBI may have supplied dollars in the market to check the volatility. But we still have more than the 9-month import cover, a cushion that is required of forex reserves. We are in a far better situation than China, which spend $108 billion in a month to defend their currency and about $518 billion in the calendar year 2015. Our debt limits are fully subscribed, some natural outflows may have happened out of the capital account, the equity outflows would have also contributed to the fall in the reserves.” China’s total reserves are about $3.3 trillion.
A senior forex dealer said, “The situation will continue for a while as the RBI continues to defend the rupee and tries to keep it in a band of Rs 66 to Rs 68 to the dollar. Though the RBI is selling dollars, it is also buying dollars so that its reserves are not depleted. The central bank is keeping the market in a tight position.”
The fall in the gold prices have also impacted the reserves to a small extent of $0.30 billion.
The debt limit in the government bond market was expanded by $2.8 billion in January and it was fully subscribed, which shows that foreign investors want to be in the Indian markets and will continue to stay invested.
Bank of America said in a report, “We expect the RBI to maintain stable forex reserves to anchor Rs 65 to the dollar expectation. If forex flows continue to stall on global uncertainty, the RBI will likely roll over 2013’s FCNRB deposits (foreign currency non resident bank deposits) of $26 billion when they mature in the end of 2016. Further, FPI debt and equity investments have risen to 121% of FX reserves from 72% in December 2007.”
On Thursday, China set up an an official midpoint rate on the yuan at 6.5 per dollar, the lowest since March 2011. A few weeks back, it had extended the yuan trading hours to 11:30 pm local time to attract more investors including speculators to artificially boost its markets.