The Hindu Business Line : Forex reserves decline $2 b on revaluation of currencies

Forex analysts said the drop in reserves is largely on account of revaluations in the central bank's basket of currencies, following the appreciation of dollar against global currency majors.

For the week ended January 7, 2005, total reserves fell to $129.112 billion, from an all-time high of $131.178 billion, for the week ended December 31, 2004, as per the latest Reserve Bank of India statistics.

According to the weekly statistical supplement (WSS) of the RBI, the drop in reserves can be ascribed to a fall in Foreign Currency Assets, which came down by $2.042 billion to touch $123.122 billion during the week ended January 7. Added to this there was a $24-million decline in the central bank's Reserve Tranche Position with the International Monetary Fund, which is now at $1.403 billion.

Foreign currency assets expressed in dollar terms include the effect of appreciation and depreciation of non-US currencies, such as euro, sterling, yen, held in the reserves, as per the notes to the RBI's weekly statistics.

Analysts concur that the latest decline in reserves, is largely on account of cross-currency fluctuations, mainly with regards to the dollar movement against the euro, pound sterling and the yen.

During the week under review, while the euro was weaker against the greenback at $1.3515, on January 3, it appreciated to $1.3186 on January 6. However, on January 7, the euro saw some correction and settled around $1.3211 levels, with the dollar showing signs of strengthening once again.

Similarly, while the yen held steady against the greenback at 102.66 on January 3, it lost considerable ground to the dollar and touched a low of 104.94 on January 5, before settling at around 104.46 levels on Friday.

Even the rupee, opened strong against the greenback at 43.48/49 on January 3, but closed 44 paise lower on January 7, at 43.91/93.

"The dollar started 2005 on a positive note in expectation of good US economic data.

The signs of recovery had started in December itself and this has played a part in eroding the reserves to some extent", said a treasury head of a leading public sector bank.

The first week of January 2005, also witnessed some turmoil in the domestic equity markets, and the markets were abuzz with rumours of some foreign funds pulling out of Indian equities.

Some analysts are of the view that the latest decline in foreign exchange reserve, could be in part due to the funds outflow that occurred during this period.

The last time when forex reserves had recorded such a significant decline, was during the week ended February 28, 2003, when the pre-payment of ADB and the World Bank loans by the Government resulted in a $2.477-billion drop in reserves.

At that time, the Government of India had purchased $3.035 billion from the central bank for prepayment of these loans.

Following this, the forex reserves fell by $2.477 billion to $72.877 billion.

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