09 May 2023, 07:20 pm
India's foreign exchange reserves are at a comfortable level currently, benefiting from the Reserve Bank of India's persistent intervention and the likelihood of less volatile revaluation changes, economists said.
India's forex reserves reached a 10-month-high of $588.8 billion in the week through April 28, recovering from a drop to $524.5 billion last October, when the rupee hit a record low against the U.S. dollar.
Since October 2022, the RBI has been rebuilding the reserves, taking advantage of the rupee's recovery. The central bank bought more than $8 billion in the spot market in November and December, according to its data.
The RBI has been buying dollars in the forward market too. Its net outstanding forward dollar purchases reached $20.4 billion in February, the latest month for which data is available, after having dwindled to $241 million in October.
Since October, "comfort on the level of reserves has improved significantly," said Gaura Sen Gupta, economist at IDFC First Bank.
"Reserves (both spot and forwards) are now equivalent to 10.4 months of import cover, compared with about 8.9% in Oct 2022."
Moreover, said Vivek Kumar, economist at QuantEco Research, the RBI will continue "using reserve buildup opportunity to bolster its import cover further".
In the wake of the RBI's intervention in spot and forwards, the rupee's response to the dollar's decline has been fairly muted.
While the dollar index has lost about 11.5% from its peak in September last year, the rupee has recovered about 1.5% from its record low.
And, given that the RBI will want the rupee "to remain ranged", the local currency will continue to somewhat underperform, said Sakshi Gupta, Principal Economist, HDFC Bank.
Besides the RBI's intervention, the revaluation changes due to the dollar index's decline since October and the fall in U.S. yields have been major contributors to the increase in reserves.
Now, with the Federal Reserve likely to pause its rate-hike cycle and the U.S. dollar's soft outlook, there is expected to be less volatility around revaluation changes, said IDFC's Gaura.
And provides an added layer of comfort as far as the adequacy of forex reserves is concerned.