INDIA’S DOLLAR RESERVES HIT RECORD LEVELS

picture-53584-1407970063By Shiv Mehta, CFA

According to a statement released by the Reserve Bank of India on Friday, India’s dollar reserves reached its record of $355.95 billion, capping a third consecutive week of growth and marking an increase of $2.54 billion from the week ending March 18.

This increase in forex​ reserves can be attributed to the Indian Rupee, which jumped by 2.7% in March as investor sentiment improved due to the government’s announced budget and monetary policies last month. The Indian Rupee is headed for its biggest monthly increase in more than two years.

RBI IN STRONG POSITION

With the rise in forex reserves, RBI’s Governor Raghuram Rajan puts himself in a strong position to protect the Indian economy from capital outflows that could result from the U.S. Federal Reserve’s impending interest rate hike and the risk imposed by a slowing Chinese economy. It also gives Rajan more room to lower interest rates.

Ankur Jhaveri, co-head of currencies and rates at Edelweiss Financial in Mumbai, said, “With record reserves in hand, the RBI is in a much more comfortable position to counter any bouts of volatility.” He added, “The central bank will cut the benchmark repurchase rate by 25 basis points at its April 5 meeting.”

INDIAN RUPEE MAY STABILIZE

A rise in forex reserves has provided Rajan more power to support the rupee. Edelweiss Financial Services Limited said, “Stable currency will aid central bank efforts to control inflation and give it more room to lower borrowing costs.”

The Indian rupee has been under pressure for the past two-and-half years, ever since the Fed initially began to wind down its quantitative easing program. In August 2013, the rupee declined to an all-time low of 68.845 a dollar when foreign institutional investors started to pull their money out of the Indian markets. Since then, the rupee has appreciated by 3.3%.

Khoon Goh, a senior currency strategist at Australia & New Zealand Banking Group Limited based in Singapore, said, “[RBI has] taken the opportunity to re-accumulate reserves when sentiment turned positive toward the rupee.”

In March, the foreign investors bought net $2.58 billion worth of Indian stocks and $371 million worth of government and corporate debt.

 

 

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