CashNews.co
The monetary authority “seems relaxed about holding larger forex reserves, owing to its desire to build buffers against contingent external risks,” BofA analysts Rahul Bajoria and Abhay Gupta wrote in a note Friday. India’s reserves adequacy appears strong compared with other major emerging markets, but not necessarily excessive, they said.
India has the world’s fourth-biggest foreign reserves at $692 billion as rising overseas inflows into the nation’s stocks and bonds have helped the Reserve Bank of India boost its stockpile to a record high. The amount provides stability to the rupee against external shocks, with the RBI using its reserves to limit extreme swings in the currency hovering near a record low.
BloombergThe growth in FX reserves will be driven by a balance-of-payments surplus, owing to a smaller current-account deficit, the analysts wrote.
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RBI Governor Shaktikanta Das has repeatedly stressed the need to build a forex buffer to act as a shield during periods of market volatility.
“USD/INR‘s wider daily ranges recently have created some wiggle-room for limited INR appreciation, and higher volatility compared to over the past year,” Bajoria and Gupta wrote. “However, the RBI can simultaneously attain its multiple objectives of building a larger reserves buffer and maintaining currency competitiveness, while allowing limited bilateral INR appreciation.”