Indian Forex Reserves Surge Past $707 Billion Mark

Synopsis

India's foreign exchange reserves rose to $707.002 billion in the week that ended Aug. 7, the biggest weekly increase since January, driven by fresh buying by the Reserve Bank of India (RBI) under its FCNR(B) deposit swap scheme that continues to bolster the nation's foreign buffers.

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A Sharp Weekly Gain

Foreign exchange reserves increased significantly in the week ended Aug 7 by $14.136 billion to $707.002 billion, data from the Reserve Bank of India showed. The rupee value of the reserves increased by ₹1,19,945 crore to reach ₹67.32 lakh crore, after the previous week's increase of $10.512 billion brought the rupee value of the reserves to $692.866 billion.

The gain was the largest weekly increase since the week ended Jan. 30, but the kitty is still short of the record $728.494 billion touched in the week ended Feb. 27, which was hammered by the West Asia conflict.

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The foreign currency assets, which were the largest asset class, went up 1.8 per cent to Rs $574.625 billion in the reserves, followed by an increase in gold reserves of Rs $3.995 billion to Rs $108.738 billion, and a hike in special drawing rights (SDR) by Rs $79 million to Rs $18.745 billion and the India's reserve position with the IMF by Rs $116 million to Rs $4.894 billion.

The FCNR(B) Effect

The increase is due to a conscious policy shift. This is because banks can raise fresh foreign-currency deposits for three-to-five-year period and pass the dollar deposits on to the central bank at the current spot rate while the RBI foot the due hedging cost, allowing banks to provide them with competitive rates on deposit.

The momentum quickly gathered: the initial $20bn under the scheme was generated in 38 days; the following $20bn in the 14 days from August 1 to 14 was raised; and in the 13 days from August 1 to 13, an additional $16bn was raised, bringing the total to $56.8bn.

The RBI has decided to shut down the facility early, offering swaps until 11 September, as opposed to the earlier September 30, and deposits mobilised until 31 August. Madan Sabnavis, chief economist at Bank of Baroda, stated “whatever target the RBI may have had, it appears to have been comfortably achieved” while the dollar surplus would also go towards the systemic liquidity.

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