India's forex reserve nears record $400 billion

Hyderabad: India’s foreign exchan-ges reserves crossed $398.12 billion in the week ended on September 1, almost nearing a record $400 billion.

According to RBI data, India received a massive inflows of $3.572 billion in the week ended on September 1. In the previous week, the reserves had increased by $1.148 billion to $ 394.55 billion. According to a report of American brokerage Morgan Stanley, India’s reserves were expected to touch the $400-billion mark in the week ended on September 8.

As Reserve Bank of India published its foreign reserves data with a time lag, the exact data on the current day basis would not be available. However, in the backdrop of global risk averseness among investors, experts suggest that the country may miss the September 8 deadline for touching $400 billion.

With $398.12 billion in forex kitty, India can cover almost one year of its import bill, which stands at $405 billion. Expressed in US dollar terms, foreign currency assets include the effect of appreciation or depreciation of non-US dollar currencies, such as the euro, the pound and the yen held in the reserves.

While higher foreign reserves are good for the country’s economic stability, it would lead to appreciation of local currency — the rupee. On Friday, the rupee surged by 27 paise to hit a fresh one-month high of 63.78 against the dollar as the beleaguered US currency continued its incessant free-fall worldwide.

 This was the best close for the domestic currency seen since August 8, when it had settled at 63.63 per dollar.  The rupee has risen more than six percent this year against the dollar, snapping six consecutive years of depreciation. Its impact has magnified due to the decline of currencies of many competitors of India over the same period.

A strong rupee compared to those of competing countries would hit the country’s exports, affecting an already slowing economy. While the RBI could buy foreign reserves to contain or slow down the rupee’s appreciation, it would result in fresh infusion liquidity in the domestic market. The higher rupee liquidity could lead to inflation or lowering of interest rates.