India’s Forex Reserves Surge Past $500 Billion
India’s foreign exchange reserves have soared past half a trillion dollars, helped by a rebound in equity flows and foreign direct investment deals.
Forex exchange reserves rose to $501.7 billion for the week ended June 5, up by $8.22 billion. This is the highest level of forex reserves India has ever held.
After a bout a outflows in March and April, foreign investors have turned net buyers of Indian equities, although they remain sellers of Indian debt. FPI bought Rs 14,569 crore in equities in May and another Rs 22,175 crore in June. For the year-to-date, FPIs are still net sellers of equity and debt to the tune of Rs 1,10,536 crore. In addition, a string of foreign investments into Mukesh Ambani owned Reliance Jio were also expected to bring in dollar flows.
Since the taper tantrum of 2013, forex reserves have close to doubled.
K Harihar, treasurer at First Rand Bank said that a number of factors led to the large addition of $8.2 billion in reserves. The flows were a combination of equity inflows and individual deals such as those struck by Reliance Jio, along with some foreign funds that may have come in on account of the Reliance Industries Ltd. rights issue, Harihar said.
While the RBI maintains that it only intervenes to curb volatility in the currency, market participants expect the central bank to continue mopping up dollar flows. One reason could be that in a thinly traded market, large flows could lead to sharp appreciation, said Harihar. He added that mopping up dollar inflows also infuses rupee liquidity, which will help in the central objective of keeping the markets well funded. In addition, a stronger currency could further hurt Indian exporters at this stage.
Indranil Sen Gupta, India economist at BofA Securities, in a note on Thursday, said they expect the RBI to buy forex at every opportunity to guard against contagion. “Looking ahead, we expect the RBI to buy $45 billion of forex ($11.1 billion so far) assuming a flat current account,” Sen Gupta said. The brokerage house expects the rupee to trade close to 74 against the U.S. dollar.
A Strong Reserves Kitty
The build up of forex reserves provides India a strong cushion to guard against currency volatility.
Reserves now provide import cover of more than twelve months based on the level of merchandise imports in January. Since then imports have fallen sharply due to global restrictions imposed to curb the spread of the Covid-19 virus.
The strong reserve cover, an expected modest current account deficit and no sovereign foreign borrowings are among factors contributing to India’s external sector strength, noted rating agency Standard & Poor’s in its latest rating rationale for India.
“India's external settings continue to support our rating, owing largely to the country's modest external debt stock. As a large net importer of energy, low oil prices benefit the country's terms of trade, likely leading to a lower current account deficit over the next few years,” the rating agency said. S&P has maintained India’s BBB- rating with a stable outlook.