Mumbai: The Foreign Exchange (FOREX) reserves of India increased to a record USD 729.3 billion in the week ended August 21, according to the Reserve Bank of India (RBI).
The latest data released by the RBI shows that FOREX reserves increased by USD 12.4 billion during the week, taking the total reserves past USD 728.5 billion accumulated in February.
The rise in reserves has been supported by strong foreign currency inflows following measures introduced by the central bank in June to attract overseas capital. These included a special deposit programme for overseas Indians and other non-resident customers, aimed at strengthening foreign currency liquidity in the domestic financial system.
The measures had attracted around USD 72.8 billion in inflows through August 21.
The inflows have strengthened India’s external position and reduced the risk of a third consecutive year of a deficit in the country’s broadest measure of capital flows.
The record reserves provide the RBI with greater capacity to intervene in the foreign exchange market if the rupee comes under renewed pressure.
The Indian currency has recovered around 1.7 per cent from its record low in May, although higher crude oil prices and India’s dependence on imported fuel continue to pose risks.
A rise in oil prices typically increases the country’s import bill and demand for foreign currency, putting pressure on the rupee. A larger reserve stock gives the central bank greater flexibility to supply dollars to the market and limit excessive currency volatility when necessary.
However, the strategy of attracting overseas deposits has also increased the cost for the central bank.
Under the special diaspora deposit programme, the RBI bears the hedging costs incurred by banks, enabling lenders to offer more attractive interest rates to overseas customers.
The cost of mobilising funds through the programme has become more significant as US interest rates remain substantially higher than they were in 2013.
The RBI had last turned to overseas residents that year to raise foreign currency and strengthen its reserves during a period of pressure on the rupee.
The RBI earlier this month advanced the closure of the special diaspora deposit programme, with Governor Sanjay Malhotra saying inflows had been stronger than anticipated.
The decision came after the scheme helped generate substantial overseas inflows and contributed to the sharp improvement in the country’s reserve position. (BVI)
