India's forex reserves cross $400 billion for the 1st time

India’s foreign exchange reserves crossed $400-billion-mark last week, data released with a lag of seven days by the Reserve Bank of India (RBI) showed.

As on September 8, the foreign exchange reserves with the central bank was at $400.73 billion, up by $2.6 billion from a week ago. Most of the reserves, about $376.20 billion, are held in foreign currency assets, such as US dollar, euro, pound sterling, Japanese yen, etc. and is valued in terms of US dollars. While the central bank does not give a breakup of its foreign currency assets, analysts peg the share of dollar to be anything between 60 per cent to 70 per cent of the total foreign currency assets.

Gold’s value in the total reserves was about $20.7 billion, while the Special Drawing Rights of the International Monetary Fund stood at $1.5 billion. The Reserve position in the IMF (quota allotted to India minus IMF’s holding of rupee) was $2.3 billion.

A year ago, the total reserves were about $371 billion. The reserves have particularly swollen in the past three years after the Bharatiya Janata Party-led (BJP-led) government won a landslide victory to form the government.

The central bank lapped up dollars aggressively as foreign investors started pouring huge amount of money in local assets In the absence of intervention by the central bank, rupee could have strengthened much more than how it has moved since its lowest in August 2013 of 67.87 a dollar. The rupee closed at 64.08 a dollar on Friday.

Famously, RBI under governor D. Subbarao did not accumulate dollars as it let the market forces to determine an appropriate rupee value. That practice was reversed by Raghuram Rajan who in his three years to September 2016, added about $77 billion in reserves. Present governor Urjit Patel, though, have stepped on to the gas a little bit more and in his one year so far, he has already added about $30 billion in India’s reserves.

India’s import cover has now crossed more than 12 months, indicating the capability of the reserves to take care of the country’s normal functioning for the next one year. The import cover had fallen to less than seven months in 2013.

However, economists say the boost in foreign exchange reserves is a result of capital flows, and not necessarily from trade surplus. Therefore, the money can go out the same way it has come and the central bank will have to again intervene, this time selling dollars, to protect the value of the rupee.

Therefore, the numbers may look psychologically great, but the quality of the reserves could be still shaky, economists say.

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