This Article is From Jul 02, 2014

RBI Buys $19.1 Billion Forex Forwards in May to Shore Up Reserves: Report


The Reserve Bank of India (RBI) will continue to shore up its forex reserves after having bought $19.1 billion of short-term forwards in May following improvement in investor confidence post Narendra Modi-led BJP's victory in the general elections, according to a report.

The RBI will continue to purchase when the rupee trades at 58-60 against the US dollar, the report by Bank of America-Merrill Lynch said.

BofA-ML India chief economist Indranil Sen Gupta said the apex bank will recoup forex when the Indian currency is around 58-60 against dollar.

He noted that shoring up the forex cover is needed as the import cover has halved to about eight months- a level not seen since 2008. And for the RBI to maintain this level of forex cover, it has to accrue $14.5 billion annually.

Quoting the just-released SDDS data from the IMF which showed the RBI bought $19.1 billion of short-term forwards in May, Mr Gupta said, "We grow more confident of our call that Governor Raghuram Rajan will recoup forex to build the 'bullet-proof national balance sheet' he had talked of earlier."

According to the IMF's SDDS data, the RBI bought $19.1 billion of short-term forwards in May reaping the advantage of improved investor confidence after Mr Modi's win.

This brought down the net outstanding forward forex sales to $11.4 billion from $32 billion at end-April. Bulk of these short-term long forward positions will mature in the second half of the current fiscal year.

The forex reserves rose by $1.385 billion to $314.92 billon, close its record high of $320 billion in September 2011, the latest data from the apex bank showed.

The final data on the forex accretion will be visible on banks' 'nostro' balances which will be released by the RBI next week. Nostro accounts are held by domestic banks in foreign countries in their currencies. They facilitate settlement of foreign exchange and trade transactions.

According to BofA-ML's BoP estimate, the RBI should be able to "buy $33 billion (inclusive of maturity of forex forwards with oil companies) this fiscal year. This assumes that this fiscal year gets $25 billion in portfolio inflows.

"On balance, we expect it to hold rupee at 58-62 to the dollar with the dollar settling in 1.30 to the euro, he said. When Bimal Jalan was the governor in NDA's last regime, the RBI has had doubled import cover to almost 15 months. The Modi regime has returned to office at an 8-month import cover, the same as 1998.

"In our view, the road to stable appreciation lies through higher forex reserves that strengthen investor confidence. The forex market has already rewarded Rajan's efforts to raise forex reserves with a stable rupee," Mr Gupta said.

"As the RBI continues to rebuild forex reserves over the next two-three years, the rupee will turn course towards appreciation."

He also said the Modi government should be able to raise $5-8 billion through a sovereign bond issue to accumulate long-term forex and if the government bonds are listed on EM bond index it could mop up $25 billion from benchmark debt funds from a position of relative strength.