MUMBAI : India’s foreign exchange reserves have climbed to a record $729.33 billion, recovering sharply from the pressure seen earlier this year as banks pulled in overseas dollars through a Reserve Bank of India facility aimed at strengthening the country’s external position.
The reserves rose by $12.42 billion in the week ended August 21, taking the total above the previous record of $728.49 billion reached in February. The latest increase was led by foreign currency assets, which rose $9.48 billion to $591.33 billion, while the value of gold reserves increased by $2.8 billion to $114.22 billion.The bigger movement has taken place over the past two months.
India’s forex reserves have increased for eight consecutive weeks, adding about $63 billion during that period. The recovery followed a steep fall in the second quarter, when reserves dropped to about $666.9 billion by the week ended June 26 as the RBI sold dollars to manage pressure on the rupee amid the West Asia crisis and higher energy prices.
A major reason for the turnaround is the RBI’s special dollar-rupee swap facility announced in June. The facility was designed to encourage banks to bring more foreign currency into India through three channels Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, overseas foreign currency borrowings and external commercial borrowings.
By August 21, the three routes had mobilised $72.85 billion. FCNR(B) deposits accounted for $65.397 billion, almost 90% of the total. Overseas foreign currency borrowings contributed $4.86 billion and external commercial borrowings another $2.59 billion.The scale of the FCNR(B) response is particularly notable.
At the end of May, outstanding FCNR(B) deposits stood at about $34.04 billion. By August 21, the amount mobilised under the special facility alone had reached $65.4 billion. Banks were able to offer overseas Indians more attractive returns because the RBI was providing a concessional swap arrangement that reduced the currency risk involved in bringing those dollars into the banking system.
The RBI’s move came at a difficult point for India’s external accounts. Foreign investors had been pulling money from Indian markets, while the rupee had come under pressure from high oil prices and wider global uncertainty. India imports most of its crude oil requirements, so a prolonged rise in energy prices can quickly increase the demand for dollars.
The reserve build-up gives the central bank more room to intervene when the rupee comes under pressure. It also provides a larger buffer for meeting essential import payments during periods of external stress. But the record reserve number needs to be read alongside the nature of the inflows.
FCNR(B) deposits are bank liabilities rather than permanent additions to India’s wealth. The deposits have to be repaid to depositors at maturity, meaning the dollars attracted through the programme cannot simply be treated as a permanent reserve gain. There is also a cost attached to the RBI’s support. The central bank is effectively taking on part of the foreign-exchange risk associated with the concessional swap arrangement.
The response was strong enough for the RBI to bring forward the closure of the FCNR(B) swap window.
The facility was originally scheduled to remain open until September 30 but was brought forward to August 31.
Swaps against FCNR(B) deposits mobilised under the scheme can continue with the RBI until September 11, while the facilities linked to overseas foreign-currency borrowings and external commercial borrowings remain available until December 31.
