The Reserve Bank of India (RBI) is starting to add to its stockpile of foreign exchange assets yet again after valuation changes and periodic market interventions caused the reserves to shrink about $100 billion from record highs late last year, reported The Economic Times.
Renewed stock purchases by overseas funds and buy-sell swap trades are among several factors that helped India’s forex kitty climb at the fastest pace in nearly 14 months.
Market participants believe the Reserve Bank of India (RBI) is unlikely to let the rupee appreciate much amid rising foreign fund inflows. India’s prospects as a destination for global money are brightening as investors such as Tiger Global are reportedly pulling out of China.
Forex reserves of India jumped $6 billion to $531 as on October 28.
Internal estimates by two large banks with significant foreign exchange exposure suggest that buy-sell swaps and dollar purchases around the 82 mark contributed about 50% to the increase in reserves. The rest could be due to valuation gains due to a falling dollar index.
In the last week of October, the central bank is said to have intervened in the currency markets as the local unit gained over a percentage point in just about a week’s time — to 81. 92 from 82. 80 on October 24.
During the same period, the dollar index that measures the unit against other major currencies fell more than 1. 5%. This essentially raised the valuation of all non-dollar investments — such as those in euro, yen or yuan.
Moreover, the RBI has likely conducted buy-sell currency swap trades to neutralise the liquidity impact of conventional spot-market interventions through dollar sales. It helped the local unit to stabilise itself against the US dollar while simultaneously ensuring adequate rupee availability to boost economic growth. Such a mechanism also aids replenishing forex reserves.
India’s foreign exchange reserves, at a record high of $642 billion on October 29, 2021, have been sliding amid central bank efforts to moderate the pace of the rupee’s losses against the greenback.