India's forex kitty grows by $101.5 bn in FY21, steepest ascent in one monetary year

3 Apr
2021

India's forex kitty grows by $101.5 bn in FY21, steepest ascent in one monetary year

By Staff Writer

India's forex kitty grows by $101.5 bn in FY21, steepest ascent in one monetary year

India’s foreign exchange reserves continue to be in record setting mode – FY21 saw $101.5 billion dollars accretion in reserves. This is the steepest rise ever in foreign exchange reserves in one financial year. Data published on Friday also showed the central bank shored up its forex reserves to $579.3 billion as on March 26. This is slightly down from the record high of $590 billion in January-end.

India’s forex reserves is ranked third in the world after Japan and China, show Bloomberg data compiled by ETIG.

“On balance, we expect RBI to continue its proceed FX policy of buying FX when USD weakens and allowing depreciation if it strengthens,” said Indranil Sengupta, Chief India economist at BoA Securities. “Large depreciation during global shocks, like 2011, 2013 and 2018, will be a thing of the past.”

“Indian markets will likely see greater portfolio inflows going ahead as adequate FX reserves cut INR risks,” he said in a report.

BoA has forecast RBI’s forex intervention at $93 billion in FY21 and $45 billion in FY22 at a current account deficit of 0.5% of GDP.

The rise in reserves accelerated in recent years. The central bank took 12 years to build its first $100 billion war chest since the balance of payment crisis in 1991, when India had reserves to cover only 15 days of imports. In December 2003, reserves crossed the $100 billion mark for the first time. Now, foreign exchange reserves can cover more than a year’s import payments.

Experts say the reserves pile-up may continue into next fiscal because a current account deficit of less than 1% of GDP may make RBI purchase more US dollars to avoid rupee appreciation. Estimates for next year are around $645 billion by March 2022, says Rahul Bajoria, chief India economist at Barclay's Capital.

There’s however a dilemma for the central bank. Interventions to keep rupee – the best-performing currency among India’s Asian peers – at a level RBI is comfortable during strong forex inflows means buying dollars.

Spot market dollar purchase adds surplus rupees into the banking system, which is already awash with Rs 8.3 lakh crore durable net liquidity.

And purchasing dollars through the forwards market, which RBI is doing of late, triggers a rise in forwards premium, prompting spread betters to tap arbitrage opportunities between offshore and onshore currency derivative markets.

On the latter impact, RBI recently consulted top bank treasury heads, as ET reported on April 1.

RBI’s key policy stance is however to build high reserves to minimise the impact of global shocks. “Under an uncertain global economic environment, emerging market economies typically remain at the receiving end,” said RBI governor Shaktikanta Das in a recent speech. “In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers…”

How much forex buildup happens, given the central bank’s commitment, then depends on the rupee level RBI is looking to maintain.