India's forex reserves rose by $8.2 billion during the week ended June 5 to cross the half-a-trillion-dollar mark for the first time. Forex reserves rose to $501.7 billion from $493.5 billion a week earlier. The increase was due to an $8.4-billion jump in foreign currency assets to $463 billion. Of the other components of the reserves, the value of gold declined by $329 million to $3.2 billion, and reserve position in the International Monetary Fund rose by $832 million to $4.2 billion.
Bankers attributed the increase in reserves to dollar inflows arising out of deleveraging by Indian corporates. Reliance Industries has been selling large chunks of its holding in Jio Platforms to global investors and has received a commitment of £9.78 billion. Bharati Telecom too raised $1 billion selling stake through a block deal. GSK sold $3.3 billion in Unilever. Bankers say that large deals, even the ones in local markets, end up drawing foreign investor interest.
“The RBI has been buying dollars since governor Shaktikanta Das took charge in 2018. With forex reserves, the more you have, the less the need to sell. The forex market knows that the RBI can easily sell $50 billion to ward off speculative attacks,” said Bank of America Securities India economist Indranil Sen Gupta. He added that as a result, forex markets have avoided testing the rupee even as other currencies like Brazil, South Africa, Turkey, and Indonesia have come under pressure.
But banks say that high reserves does not mean that all is well on the external front. “The dollar bond yield on Indian credit is still higher than pre-Covid level. Yields have come down of late because of easing dollar liquidity, but they are still away from pre-Covid levels. The reason for the underperformance is how the macros are stacking up, plus uncertainty in respect of the infection and associated costs,” said DBS head (treasury) Ashhish Vaidya. “The positive is that there is a larger coverage of imports, which makes India less vulnerable. The corporate deleveraging also reduces the overall risk in the corporate sector,” said Vaidya.
