RBI may use rupee rise to beef up its forex reserves.

Appreciating rupee will be an opportunity for the Reserve Bank of India (RBI) to beef up its foreign exchange reserves. After May 2008, India’s foreign exchange reserves have not crossed $300 billion and reserves are not more than 7-8 months of India’s imports, down from the total equivalent to 12-months’ imports.

The total reserve position with RBI as on September 21 (last available consolidated data) was $293.97 billion.

Researches estimate that the central bank could buy up foreign exchange of over $5 billion, the positions held by it in the forwards market.


Bank of America Merrill Lynch said in a report, “We expect the RBI to revert to its late-1990s tactics of buying foreign exchange (fx) when risks are on and selling when risks are off which should stabilise the rupee expectations in Rs 52-56 to a dollar.

The RBI is likely to buy (or unwind forwards of) $5 billion if the rupee stabilises at Rs 52 to the dollar with the dollar settling about 1.30 against the euro.”

Bank’s research estimates that the RBI could bring back about $5.5 billion by unwinding its forward positions.

Experts say that it would be too risky to wait for too long. Ashutosh Khajuria, president treasury, Federal Bank said, “If RBI sees that our exports are not competitive enough, it will buy up dollars.


It is now a good time for RBI to build up its reserves because our reserves are below $300 billion for past four years. We only have an import cover of 8 months which is dangerous, while earlier it was comfortable at 12 months of import cover.”

The rupee ended Rs 52.40 to a dollar. According to a Deutsche Bank report, “The Indian rupee has been the biggest gainer in September compared to all its Asian peers.

The rupee appreciated 5.5 per cent this month against the US dollar on the back of renewed FII flows, post the government’s announcement of reform measures to improve the fiscal situation and investment climate in the country.”

The report adds that foreign exchange holdings of banks have also gone up with banks' nostro (foreign exchange) balances crossing a comfortable $20 billion, including the RBI’s $14.5 billion forex forward liabilities.

Second, the current account deficit should peak off to 3.6 per cent of GDP from 4.2 per cent last year, said the report. A nostro bank account is an account that is held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions.

The Merrill Lynch report says, “Our oil strategists warn that QE-III – that we expect in December - could drive oil up to $120/bbl again.”


Source : wrd.mydigitalfc.com