Forex reserves growth slowest in four years.

MUMBAI: Foreign exchange reserves' accumulation has plunged to a four-year low exposing the rupee to volatility if overseas investors turn jittery due to the US 'fiscal cliff' or a return of the European sovereign crisis.

The country's foreign exchange reserves have grown the slowest since the crisis year of 2008 as the central bank lets the market determine the currency level. But a continuation of this policy may lead to the RBI buying US dollars as the reserves are now enough to meet only about seven months' imports.

Since end March, only $893 million in dollars have been added to the country's forex reserves kitty, less than a third or more in the preceding years.


The reserves include major currencies like the US dollar, euro, yen and the sterling pound, gold and special drawing rights, a currency of the International Monetary Fund. This is the slowest pileup in reserves in over a decade, if the $56-billion RBI sold between April and October in 2008 is excluded.

At the current levels, reserves are adequate to finance only about seven months of imports. Significantly, a sizeable pile-up in reserves so far this year has been on account of revaluation of the gold in reserves.

Given the situation, the RBI may have to buy foreign currency from the market to strengthen foreign exchange reserves to meet importer demand.

"In our view, the only way out is for the RBI to buy forex to provide the market the comfort that it can fend off contagion," said Indranil Sengupta, chief India economist at Bank of America Merrill Lynch. This would mean that the rupee might not strengthen against the dollar even if there are capital inflows as the central bank would have to absorb these inflows.

And a weak rupee could make imports expensive, adding further to the inflation pressures. Although international investors have poured in more than $13 billion into India this year, fiscal cliff in the US - where more than $600 billion of tax increases and spending cuts are expected to shrink the economy - and the European crisis could keep them on the edge.


Source : economictimes.indiatimes.com