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As Forex Reserves Slip, What Are India’s Options?

India’s foreign exchange reserves fell to just above the $400 billion mark, according to data released by the Reserve Bank of India on Friday.

Forex reserves slipped $33 million to $400.8 billion for the week ended Aug. 17. Reserves are now down by about $26 billion from the record high of $426.082 billion seen on April 13.

The Cost Of Intervention

Forex reserves have fallen as the central bank has had to step in to cushion the fall in the Indian currency, which fell to a record low this month. On Aug. 16, the rupee fell to an intra-day low of 70.40 against the dollar. The rupee has fallen 9 percent so far this year, making it the worst performer in Asia.

While the RBI’s stated position is that it does not step in to defend any specific levels on the currency, it does intervene to stem volatility.

Between April and June, the central bank has sold a net of $14.4 billion to cushion the fall in the currency, shows data released as part of the RBI’s monthly bulletin. The data comes with a two-month lag and hence dollar sales in July and August are yet to be released.

Adequacy Of Reserves

Despite the fall, the level of forex reserves is considered broadly adequate. At the current level, reserves are adequate to cover more than nine months of imports. The IMF, in its Article IV consultation report on India, noted that India’s external position is broadly consistent with fundamentals and added that international reserves are adequate for precautionary purposes.

Still, brokerage houses say that a number of options are open to the RBI, should they need to strengthen reserve cover.

Bank of America-Merrill Lynch, in a report on Friday, reiterated its call for NRI bonds to support the rupee and forex reserves. Raising interest rates has not helped much in attracting foreign flows, said the research house while adding that it believes forex reserves are inadequate to tackle pressure on the currency.

NRI bonds could come to the rescue of the rupee, the worst-performing Asian currency in the calendar year-to-date, said Bank of America-Merrill Lynch.

According to Nomura, the RBI has a host of options to protect the rupee and shore up reserves. These include:

  • Hiking rates and tightening liquidity.
  • Raising custom duties on imports and offering exports sops.
  • Announcing measures to boost capital inflows, such as liberalising foreign direct investment and external commercial borrowing norms.
  • Raising NRI or foreign-currency denominated bonds.
  • Curbing capital outflows by placing restrictions on outward remittances and investment.

Nomura believes that if the currency pressures persist, the RBI will likely hike rates before considering issuing any NRI bonds.