India's Forex Kitty Jumps $7.26 Billion

Foreign exchange reserves of the Reserve Bank of India (RBI) increased $7.26 billion to reach $674.19 billion in the week that ended on July 3, reversing a week of losses, the RBI said in a data release on Friday.

The biggest contributor to the reserves was foreign currency assets, which rose by $4.51 billion to $545.58 billion, due to the appreciation or depreciation of non-U.S. currency holdings in the reserves.

The State Bank India in a note on the data noted that the RBI's foreign currency reserves rose by $4.4 billion during the fortnight, showing the RBI's intent to recover foreign currency reserves as well.

Gold's Contribution

The week's gains came from gold, which accounted for a significant portion of the gains. The value of gold reserves increased by $2.669 billion to $105.205 billion during the week while SDR increased by $65 million to $18.623 billion.

Examine the general direction of the trend

This is the bounceback after a rollercoaster performance for India's foreign assets. The reserves had risen to an all-time high of $728.494 billion in the previous week, before the Middle East war put pressure on the rupee and led to buy-sell of dollars by the RBI.

The episode led to an unusual request by the government for the people to save forex by avoiding foreign travel, fuel consumption and gold buying for a year, which was addressed by Prime Minister Narendra Modi on several occasions since May 11.

In June, the central bank had changed its stance. The rupee finished the week almost flat against the dollar, helped by an easing in crude oil prices and a falling dollar, while at the same time, the RBI started buying dollars to replenish its stockpile.

However, the domestic currency had dipped slightly throughout the week, due to the prevailing geopolitical uncertainty in the West Asian region.

A New Inflow Channel

A structural driver is starting to get in on the reserves accumulation. The new scheme of Foreign Currency Non-Resident Bank deposits at the RBI should draw in fresh deposits of $40-50 billion and banks will be stepping up their efforts to reach out to their NRI customers, especially from the Gulf countries.

So far, the banking sector has raised between $3-4 billion through such deposits, with the bankers anticipating that the inflows would increase as the awareness spreads among the holders of the deposits from other countries.

What It Means

For policymakers, the reserve build is a counter to exactly the sort of external shock they saw earlier this year, one where geopolitical contagion saw financial stress spread from one crisis to apparently unrelated markets, leading to dollar sales and consumption appeals within just a few weeks.

The rebuilding reserve cushion, provided by market operations and inflows from the diaspora deposits, will give RBI enough space to handle rupee volatility without having to repeat the measures taken in the early part of this year.