Foreign exchange reserves of Reserve Bank of India (RBI) may breach record high of $321 billion scaled in January 2012 as the central bank continues to mop up dollars from the domestic market to restrain the rupee from appreciating further amid dollar inflow.
Last Friday, RBI's forex kitty swelled to $317.81 billion, closer to its record high. The central bank has been busy buying dollars in the spot market and swapping it in the forward market.
In July-August 2013, total reserves had fallen to $243 billion as RBI sold dollars to shore up the falling rupee.
Strong forex reserves is an ammunition against sudden capital outflows. Market participants feel that RBI needs to add more dollars to its forex kitty to meet the import cover of eight months.
"Robust foreign institutional investments, hiking the debt limits and the higher FDI limits will help RBI stock more dollars as our balance of payments is positive and can breach the record high of $321 billion. RBI also cannot allow a strong appreciation as macroeconomic fundamentals still have room for improvement," said Ananth Narayan, managing director global markets, co-head wholesale bank, South Asia, Standard Chartered Bank.
The RBI is also forced to buy the excessive dollars that come into India so as to maintain the stability of the domestic currency, which had fallen to a record low of Rs 68.80 in August 2013.
Indranil Sen Gupta, India economist at DSP Merrill Lynch, said, "RBI needs to add $80 billion to maintain the adequate import cover of eight months by March 2016."
India's import bill stood at $38.24 billion in June, up 8.33% in dollar terms over the corresponding period last year. India's trade deficit expanded to $11.76 billion in June, the highest level since July last year.
RBI executive director Deepak Mohanty said at the Saarc governors' symposium last week, "In the event of sudden capital outflow as happened towards end-May 2013, domestic forex reserves become the first line of defence to contain volatility without resisting depreciation pressure. It is, however, difficult to say how much of reserves is adequate capital outflows in a way reflect an imbalance in terms of surge in demand for foreign currency vis-à-vis domestic currency."
When RBI buys dollars, it releases rupees into the market maintaining stability for the domestic currency. But the central bank will not let the rupee appreciate too much as it makes exports less competitive.
Ashutosh Khajuria, president treasury and credit, Federal Bank, said, "RBI is stocking dollars and there is a good possibility that India will have a new record in forex reserves. It hit a record high $321 billion in January 2012." RBI buys dollars from the spot market. Of late it has been buying from the spot market and selling three- and six-month swaps in the forward market so that there is no disruption to the markets.
N S Venkatesh, executive director in charge of international banking and treasury, IDBI Bank, said, "RBI will try and recoup the forex reserves and it needs to have 8 to 9 months of import cover in case of any eventuality. The inflow of dollars from the FIIs, FDI route and the debt market investments will certainly help in reaching a new high in forex reserves. In the long term, this will be conducive for the stability of the country."