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RBI's forex reserve surge a sight for sore eyes but don’t read much into it

The sentiment towards emerging markets is still cautious amid a tightening by the US Federal Reserve. The RBI may still predominantly be a seller of dollars in the coming weeks

November 21, 2022 / 12:38 PM IST
Representative image

Representative image

The unexpected surge in India’s forex reserves after a consistent fall in the past five months has caught the attention of the market and also earned the Reserve Bank of India (RBI) some kudos. The climb in reserves, though, is more an outcome of external forces than the central bank’s tactical participation in the market.

Foreign exchange reserves showed a stellar $14.7 billion surge in the week ended November 11, according to data released by the RBI. Foreign currency assets rose $11.8 billion, while gold and special drawing rights (SDR) grew by $2.8 billion.

The climb in reserves coincides with a 4 percent decrease in the dollar index, which points to a large valuation change. The RBI holds foreign currency assets in liquid foreign currency securities, bank deposits, and deposits with other central banks. The value of the forex pile changes with the movement in prices of market securities as also exchange rates.

The RBI reports reserves after adjusting for these changes. Every time the dollar falls versus other currencies, including the Indian rupee, the RBI gets the benefit of an increase in the value of its forex pile.

Ergo, the 4 percent fall in the dollar index during the week ended November 11 could have translated into at least half of the increase in reserves, according to dealers.

“The dollar’s movement has a large role in valuations. This also somewhat corroborates what the (RBI) governor said a couple of months ago: that more than 60 percent of the fall in reserves is due to valuations,” said a forex dealer requesting anonymity.

In September, RBI Governor Shaktikanta Das pointed out that 67 percent of the change in foreign exchange reserves was due to the change in valuations. At that time, the forex pile was down $105 billion on a year-on-year basis. A look at weekly variations of the reserves also shows volatility due to the impact of valuations.

Tactical changes

To be sure, the RBI has been a tactically deft participant in the foreign exchange market. In other words, the central bank has shifted between being a buyer and a seller of dollars depending on the situation. Dealers believe that the recent influx df Dollars into equity markets and the favourable outcome in global markets may have triggered such tactical dollar purchases by the RBI.

By extension, the same would have been reflected in the reserves data. Foreign institutional investors (FII) have brought $3.7 billion to domestic markets so far this month. Notably, the sentiment towards domestic markets has taken a turn for the better with the recent fall in oil prices.

At the same time, the sentiment towards emerging markets is still cautious amid a tightening by the US Federal Reserve. The RBI may still predominantly be a seller of dollars in the coming weeks.
Moneycontrol News
first published: Nov 21, 2022 12:38 pm