RBI’s dollar buys take July forex to record highs

Mumbai: The Reserve Bank of India (RBI) bought a record $17 billion in July taking the reserves to an all-time high, but the pace of dollar accumulation may slow in a change of stance that prefers an appreciating rupee to help reduce imported inflation.Forex purchases also set a new record with $100 billion in reserves accumulating in less than a year, compared with nearly 12 years for the first $100 billion since liberalisation began in 1991.The RBI bought a record $16.9 billion from the spot market in July, according to the latest data. It also sold $930 million during the period, taking the net spot purchase levels to a record $15.9 billion. Significantly, the central bank bought $36 billion only in May, June and July. “The large foreign currency accretion to RBI reserves in July was dominantly due to economic conditions during the Covid-19 pandemic, but is also a sign of India’s attractiveness as an investment destination when global markets are awash with liquidity, seeking returns,” said Saugata Bhattacharya, chief economist, Axis Bank.Economists say that the lack of dollar demand for merchandise trade during the pandemic also added to the dollar glut, forcing the central bank to mop up dollar inflows to prevent any steep appreciation of the rupee.“One, India’s total trade deficit — goods and services — still probably had remained in surplus in July. Hence the current account, despite likely lower remittances, was also surplus. In addition, large foreign currency capital flows, both equity and debt, would have added to this surplus, necessitating vigorous RBI intervention to prevent an undue sharp appreciation of the rupee,” said Bhattacharya.The central bank is likely to have continued its dollar purchases in September as well. The forex reserves have touched a record $542 billion as of September 4.Even if the central bank slows currency purchases or is forced to draw down on reserves in the event of a speculative attack on the rupee, the reserves level may not be unduly worrisome. A BofA securities report estimates that the central bank could well afford a drawdown of $50billion to protect the rupee.

from Economic Times https://ift.tt/3kfIIwe
via IFTTT