The Hindu Business Line : Forex reserves leap by $3.37 b — More capital inflows, RBI dollar buying primary reasons

THE dollar rain on India continues and this time it has led to a historic one-time jump. Latest RBI data indicates an unprecedented rise in the forex reserves by $3.37 billion (about Rs 14,500 crore) in a single week for the week ended April 9. This takes the total reserve holding of the country to $116.06 billion.

The primary reason for the same has been the aggressive absorption of dollars by the central bank. Other contributory factors include the revaluation of the basket of currencies and return on investments of the reserves deployed overseas.

According to market players, greenbacks have flooded the market in the aforesaid week mainly by way of FII money flowing into the recently concluded, ONGC and ICICI Bank public issues. There has also been hectic selling of dollar receipts by exporters attempting to reduce the losses faced due to a depreciating domestic currency. Other contributory factors include inflows by way of NRI remittances and external commercial borrowings by corporates.

The jump came much to the awe of several treasury heads and forex analysts since the highest jumps in a single week so far have been at about $1.5 billion. "We are all discussing the impressive rise in the reserves," said Mr P. Mukherjee, Senior Vice President-Treasury, UTI Bank.

The reserves have increased by 13.67 per cent in this calendar year alone and by $1 billion in the previous week.

Rise in forex reserves is a phenomenon pervading over most Asian countries with the respective central banks attempting to protect their domestic currencies from strengthening sharply against the falling US dollar. JP Morgan estimates that Asia now holds almost 70 per cent of the world's foreign exchange reserves.

India is the sixth largest holder of foreign exchange reserves with only Japan, China, Taiwan, South Korea and Hong Kong ahead of it. India edged out Singapore in December 2003 to attain this status. The world's largest economy, the US has a much lower reserves holding of $84.345 billion since the global currency is the US dollar itself.

In India, the RBI's intervention has prevented the rupee from rising to 42 against the dollar, said a forex analyst. "The apex bank has been holding the domestic currency in spurts by active dollar absorption torn between the need to protect exporters' interests, on one hand, and curb inflationary pressures on the other," said Mr Mukherjee.

During the week ended April 9, 2004 the rupee had been volatile with about 30 paise movement to end at 43.6250/6350.

Strengthening of the domestic currency means lower earnings for exporters, which explains the ongoing hue and cry by the exporter lobbies in the country. But this can be compensated by lower import costs if the same company has commensurate imports of equipment or raw materials.

An appreciating rupee has a softening impact on inflation. This desirable fallout is because it translates into lower costs for importing oil, which constitutes over 60 per cent of the country's import bill.