The dip in forex reserves has been due to the intervention of the central bank to arrest the slide in the rupee.
New Delhi: India’s foreign exchange reserves have fallen by about $2 billion per week for seven weeks now but top government officials said they were monitoring the trend and there is no cause for alarm.
Economic affairs secretary Subhash Chandra Garg said funds would be raised through foreign currency non-repatriable (FCNR) deposits or even sovereign bonds, if the need arose.
In September 2013, then RBI governor Raghuram Rajan had raised funds through FCNR bonds and the scheme fetched $30 billion.
India’s forex reserves crossed the $400 billion mark for the first time last September but have remained volatile since. They declined to $407.81 billion on 22 June from a record high of $426 billion in April, largely on the back of a weakening rupee.
Insiders said that the dip in forex reserves has been due to the intervention of the central bank to arrest the slide in the rupee.
“We are monitoring (the situation) but there is no need to take any action now,” said an RBI official.
“Our forex reserves are adequate and this dip does not call for any policy action at this point. This is due to global developments. There is no need for any knee jerk reaction,” said another finance ministry official who spoke on condition of anonymity.
“This is a natural phenomenon and this is most likely happening due to RBI’s stepping in by selling dollars to support the rupee. No amount of reserves is ever adequate,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India group. The reserves, he added, had crossed $400 billion only last year.
China’s foreign exchange reserves in May stood at $3,111 billion. However, its reserves in April was at $3,125 billion.
High foreign exchange reserves not only help in international payments but also provide a cushion against exchange rate risks and boost sentiments.
The rupee hit a record low last Thursday to cross 69 to a dollar amid rising global oil prices and a trade war between the US and China. Although it recovered a day later amid a recovery in global equity markets, analysts expect it to touch the 70 mark soon.
Developments such as rising oil prices, tightening of global liquidity coupled with a strong dollar and an increase in US interest rates, they say, are expected to continue to put pressure on the rupee.
EXCELLENT!
70 is a psychological number the government and the RBI would wish to avoid being breached. They are right to prevent a self fulfilling cycle of panic setting in. FPIs have taken out about $ 7 billion in the last few months. Even so, the RBI should conserve its forex reserves. It could open a window, selling dollars directly to oil importers, taking their demand off the market. Sovereign bonds are better not issued at this stage, when the government is paying 8% on its borrowings. It would be seen by some as firing a distress flare.