MUMBAI: The $60-billion fall in India’s forex reserves since April may have more to do with the valuation of non-dollar currencies than with dollar sales by the Reserve Bank of India. What this means is that the impact of the dip in reserves on rupee liquidity may not be as steep as one had thought earlier.
The country’s total foreign exchange reserves, including gold and special drawing rights, stood at $250.4 billion, down $59.3 billion since the beginning of the fiscal. In fact, from a peak of $316 billion, reached on May 23, the reserves have taken a $64-billion knock. But this does not mean that an equivalent amount has actually gone out of the country.
Whenever the central bank sells dollars, it absorbs rupees from the system. In the opposite case, it infuses rupee funds when it buys dollars. Given the magnitude of the dip in reserves and assuming an average rate of around Rs 45 to a dollar through the year, the absorption of rupee liquidity should have been well over Rs 2,50,000 crore.
But data provided by RBI in its Weekly Statistical Supplement (WSS) show a dip of only around Rs 17,125 crore of rupee funds against $59.3-billion dip in reserves. The reserves basket includes special drawing rights comprising the US dollar, euro, pound sterling and the yen and non-SDR currencies that have significance in India’s cross border trade. However, the foreign exchange reserves are expressed only in terms of dollars.
The trend in reserves movement, which is published by RBI in WSS, reflects the revaluation of assets, including that of non-dollar assets. Since the currency composition of reserves is never made public (even in Parliament), it is difficult to gauge the revaluation impact. The central bank, however, puts the numbers in public domain after a quarterly lag.
According to RBI data on dollar sales, which is available till October, between May and October, forex reserves dipped $63 billion. But net dollar sales during the same period were just $24 billion. This means most of the $39-billion outflows were on account of revaluation.
However, sources close to the central bank say though RBI’s daily intervention (purchase and sale of foreign currency) is largely in dollars, there are times when importers demand non-dollar currencies. The figures published incorporate such intervention and the net revaluation impact on a weekly basis.
Source : The Economic Times