Authorities have been net buyers in US dollars in three of the first five months this calendar year, absorbing short-term inflows and keeping the rupee in sync with regional movements, DBS Bank said in a report.
Net intervention purchases (by Reserve Bank of India) likely continued into July, as the rupee shrugged post-Brexit jitters and strengthened past 67 to a dollar, said Radhika Rao, Economist, DBS Bank.
In the third quarter of calendar year 2016 so far, the rupee is amongst the best performer in the region, outdone by the Taiwan dollar and the South Korean won. Renewed slump in oil prices and risk-off mood on Thursday however, saw the rupee trim gains, she added. The report observed that since hitting a record high of near $364 billion in mid-June, India’s total foreign reserves have stabilised at $360-363 billion. The central bank has actively built reserves in recent years to shield the economy from external volatility.
“But the coverage falls short when compared to the total external debt position and as a percentage of GDP vis-à-vis regional counterparts. In addition, the ratio of volatile capital flows (portfolio flows and outstanding short-term debt) to total reserves is still high at 87 per cent by March 2016, though down from 90 per cent in September 2015,” the report said. The report said the deployment pattern of the foreign currency assets (FCA; sub-component of total foreign reserves) shows that the central bank has prioritised liquidity in recent years.
This is not surprising given the recent string of external volatile/risk events and lessons learnt from broad dislocations in the wake of the global financial crisis of 2008-09.
Reserve forex assets have thereby witnessed a shift away from deposits with central banks/ BIS/ IMF/ commercial banks towards securities. From a near equal weightage in March 2009, the share of securities has risen to about 70 per cent in March 2016.
In all, DBS Bank expects the authorities to actively beef-up the reserves stock by absorbing foreign inflows, which by extension also defends the rupee from sharp swings.