Forex reserves at three-year low

Last Updated: Sat, Jul 13, 2013 04:08 hrs

The country's foreign exchange reserves fell to a three-year low for the week ended July 5, amid the central bank's effort to curb the sharp depreciation of the rupee against the dollar.

According to Reserve Bank of India data, these had dropped by $4.5 billion to reach $280.2 bn. In the same week, the currency depreciated 1.4 per cent against the dollar. The previous occasion when forex reserves were lower than this was in the week ended July 9, 2010, at around $279 bn. Though the central bank is intervening in the forex market, it has been cautious, since the existing reserves would not cover imports for more than about six and a half months.

According to the latest weekly statistical supplement, the fall in reserves was due to a sharp fall in foreign currency assets (FCA), which constitute a substantial part of the reserves.

FCAs came down by $3.1 bn during that week. According to currency dealers, this is because the central bank has been intervening in the market to arrest the rupee's fall and, at the same time, foreign institutional investors have been net sellers in emerging markets, including in India.

After the monthly revaluation of gold, the value of gold with the RBI dropped by $1.28 bn to reach $21.55 bn. The present weakening of the currency started from May, after the April trade deficit figures were released. In April, the trade deficit widened to $17.8 bn, about 70 per cent higher than March. The jump in the deficit was attributed to a sharp increase in gold and silver import, prompting the government to raise the import duty.

The rupee has been the worst performing currency in Asia since May, having slipped about 11 per cent against the greenback during the period. Concerns that the US Federal Reserve would taper its asset purchase programme, popularly known as QE3, has made foreign investors exit emerging nations, and put pressure on most major currencies.

Meanwhile, the rupee breached the 60 to a dollar mark again in intra-day trade on Friday, due to heavy dollar demand from oil importers. However, during afternoon trade it recovered a bit and ended the day stronger by 5p, at 59.63 a dollar. It had opened at 59.76 and traded in a range of 59.61 to 60.17. It had closed at 59.68 on Thursday. According to currency dealers, dollar sales by state-run banks on behalf of RBI helped the recovery.

The rupee breaching the 60 mark took a toll on the bond market. The yield on the 10-year benchmark 7.16 per cent 2023 ended at 7.54 per cent on Friday, compared with the previous close of 7.47 per cent. RBI had called a meeting with oil marketing companies on Monday to explore the possibility of dollar sales to these directly. Currency dealers say the discussion is yet to result in a firm conclusion.

The government decided to release the Index for Industrial production (IIP) data for May and Consumer Price Index (CPI) inflation data for June after market hours, to prevent any knee-jerk reaction to such information.

According to dealers, if these data points were released during market hours, then it would have resulted in selling pressure by foreign institutional investors in debt as well as equity, due to which the rupee would have ended weaker compared with the previous close.

The IIP for May contracted by 1.6 per cent, compared with growth of 2.3 per cent in April. The CPI inched up to 9.87 per cent in June versus 9.31 per cent in May. The impact will be felt on Monday and the Street expects the rupee to breach the 60 a dollar mark again.

More from Sify: