The Telegraph
Monday , May 5 , 2014
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RBI seen to go on forex mop-up drive

Mumbai, May 4: The Reserve Bank of India (RBI) will have to buy foreign exchange reserves of $80 billion by March 2016 if it has to maintain the current eight months’ import cover.

The country’s forex reserves, at present, stand at over $309 billion, equivalent to around eight months of imports.

The central bank, which last year sold dollars heavily in the market to prop up the rupee, has in recent times been buying the US currency as the rupee has started to recover.

According to a report from Bank of America-Merrill Lynch, reserves have risen $12 billion since March.

“We expect the Reserve Bank to recoup the $70 billion of forex it sold since end-2008 at the earliest. We expect the RBI to buy $33.9 billion, including forex swaps with oil firms, in 2014-15 and $41.7 billion in 2015-16, if oil stabilises at $105 a barrel levels,” Indranil Sengupta, India economist at Bank of America-Merrill Lynch, said in a research note.

He added that a stable government after the general elections might also raise $20-25 billion by including India in a benchmark emerging market bond index; another possibility could be to raise $5 billion a year in sovereign bonds as had been done by Brazil or Russia.

“It is not as if the forex market will wait for the RBI to buy the entire $80 billion. All it is looking for is a confirmation that the RBI has returned to the Jalan-Reddy policy of building forex reserves to guard against contagion,” he added.

Pointing out that an 8-10 month import cover is a must for rupee stability, he observed that FII investment in equities had risen to 80 per cent of forex reserves now from under 30 per cent in 1997.

Though this could strengthen the rupee, the domestic currency will be adversely affected if the foreign investors withdrew heavily.

According to the report, the forex policy of the new government will be the next major trigger for the rupee. The new government is likely to allow the central bank to recoup reserves to ensure external stability.

Earlier governments, too, have followed a conservative policy of building up reserves even if it came at the cost of the rupee, the report said.

For instance, the Narasimha Rao regime of 1991-96 had let the then RBI governor C. Rangarajan to float the rupee in March 1993 and shore up the reserves to avoid a repeat of the 1991 crisis.