Surge in foreign exchange reserves suggests rupee may not come under pressure.

MUMBAI: India's foreign exchange reserves have swelled over the past few months, contributing to a 40 per cent growth in import cover, and raising hopes that the rupee will not come under pressure even if there is a reversal of flows.

Reserves are now sufficient for almost nine months of imports, up from about six months in May last year. This has resulted from both an increase in reserves and contraction in imports, data show.

With the revival of portfolio flows since December 2013, India's reserves grew to $300 billion by Marchend 2014, an accretion of nearly $25 billion since the end of August 2013.

Imports contracted to $34 billion in February 2014 from $45 billion in May 2013, primarily due to a sharp moderation in gold imports since July last year and the fact that the country's crude oil import bill was largely contained due to stable international prices.

A number of steps taken by the Reserve Bank of India since September 2013 have helped in the resumption of capital inflows.

"RBI's swap windows for banks' mobilisation of fresh FCNR (B) deposits and overseas borrowing helped build up reserves during September-November 2013," says RBI's latest report on macro and monetary developments.

Some analysts argue that the reserves should be beefed up a bit more since imports could pick up and the import cover could deplete.

"While the adequacy of India's forex reserves has improved, there is a case for a further gradual build-up. Imports will rise with growth revival and there is potential for renewed global volatility after US taper ends," said Saugata Bhattacharya, chief economist at Axis Bank

"This is also consistent with keeping the rupee from rising too rapidly as is likely with capital inflows." The build-up in reserves has somewhat eased the pressure on the external front.

Experts say even in the case of some portfolio outflows, there may not be any undue pressure on the rupee. The rupee is trading below 60 to the US dollar for the first time in eight months. Besides, RBI has also managed the liquidity generated by inflows and ensured there is no excess liquidity in the system.

Source : economictimes.indiatimes.com