The Hindu Business Line : Banks shed dollars at RBI's expense

THE Reserve Bank of India (RBI) may be flush with dollars, with its total foreign exchange assets (including gold) amounting to roughly $75 billion as on April 4, with over $20 billion being added during 2002-03 alone. But the same cannot be said about banks.

Between March 31, 2002 and March 21, 2003, the outstanding value of banks' net forex assets has fallen by almost Rs 10,000 crore, even as that of RBI has zoomed by a massive Rs 88,000 crore. What this indicates is weak demand for dollars by banks and authorised dealers (AD), which, in turn, is reflective of two factors.

First, with forex inflows vastly exceeding outflows, banks today find it necessary to hold just enough dollars to meet the immediate `transaction' requirement of importers and other users.

Second, in a scenario where the rupee has been continuously appreciating against the dollar, there is little `speculative demand' amongst banks to buy and stock up dollars in the hope of selling at a higher rate in the future. On the contrary, the fear of booking losses on account of a weakening dollar has forced banks to become net sellers in the forex market.

This has led to a situation where not only the bulk of fresh inflows of foreign exchange into the country — manifested as an increase in the outstanding net forex assets of the banking sector — but even the existing dollar holdings of banks are flowing into the RBI's coffers. The RBI has to mop up all the surplus dollars that the market, i.e. banks and other ADs, is not able to absorb.

The RBI is, therefore, caught in a situation similar to what Food Corporation of India (FCI) is facing vis-à-vis rice and wheat.

Just as the private trade is not confident of undertaking large-scale grain purchases, given the limited scope for price appreciation in the present context, banks are averse to buying dollars in a market where there is a run `for' rather than `on' the rupee.

And just as FCI is being goaded to buy virtually the entire marketable surplus of foodgrains in order to guarantee remunerative prices to farmers, the RBI is under similar pressure to incessantly purchase dollars to ensure a competitive exchange rate for exporters.

There is a difference though. Unlike the FCI's gargantuan food mountain, the RBI's forex reserves are not prone to physical deterioration or rodent attacks. The only risk is the valuation loss that could possibly arise from a strong rupee and which will have to be provided for.

To illustrate, the RBI's forex reserves of $54.1 billion as on March 31, 2002 was valued at Rs 2,63,986 crore at the then prevailing exchange rate of Rs 48.8-to-the-dollar. The value of same holdings would have fallen to Rs 2,55,875 crore by March 31, 2003, with the dollar weakening to Rs 47.3.

Similarly, the $8.6 billion added to the RBI's reserves during the first half of 2002-03 would have suffered a value erosion of about Rs 930 crore by the end of the fiscal following the rupee's strengthening from Rs 48.38 to Rs 47.3 during this period.

"Our forex reserves are valued daily on a marked-to-market basis and the gains/losses on valuation of forex assets due to exchange rate and gold price movements are booked in a separate Currency and Gold Revaluation Account (CGRA)", an RBI official said.

During 2001-02 (July-June), there was an accretion of Rs 21,886.33 crore to the CGRA — courtesy the rupee's weakening from Rs 47 to Rs 48.9-to-the-dollar. The fiscal ending June 30, 2003 may well see the RBI booking a loss of around Rs 10,000 crore on this account.

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