India has become the world’s fourth-largest holder of foreign exchange reserves, after a record surge in dollar inflows linked to the Reserve Bank of India’s (RBI) foreign currency non-resident (bank) (FCNR(B)) deposits scheme, according to data.
India’s forex reserves surge to record high
With the $44.9 billion increase in its forex kitty to a record $785.7 billion during the week ended September 4, India has dislodged Russia from the fourth spot and is now ranked only behind China, Japan, and Switzerland, the data compiled by Bloomberg showed.
The record increase in the foreign exchange reserves has taken place despite a decline in the gold reserves component by $2.59 billion to $113.81 billion during the week as gold prices fell.
Why India’s record forex reserves matter for the rupee
An increase in the foreign exchange reserves reflects strong fundamentals of the economy and gives the Reserve Bank of India (RBI) more headroom to stabilise the rupee when it turns volatile.
A strong forex kitty enables the RBI to intervene in the spot and forward currency markets by releasing more dollars to prevent the rupee from going into a free fall.
RBI announces Rs 1 lakh crore OMO bond sale
Meanwhile, the RBI has announced a Rs 1 lakh crore open market operation (OMO) sale of government bonds to mop up the excess liquidity in the banking system that has resulted from the strong inflow of foreign currency.
The RBI will sell government securities worth Rs 1 lakh crore in three tranches — Rs 50,000 crore on September 17, Rs 25,000 crore on September 21, and another Rs 25,000 crore on September 28. The auctions will be conducted through the multiple-price method using a multi-security auction.
Earlier, the Reserve Bank had raised over Rs 3.53 lakh crore through an overnight Variable Rate Reverse Repo (VRRR) auction with a 1-day tenor on Monday, to absorb surplus cash from the banking system.
A VRRR auction is a monetary policy tool used by a central bank to absorb excess cash from the banking system and ensure financial stability in the economy.
FCNR(B) inflows drive liquidity absorption
The RBI has stepped up liquidity absorption operations as the banking system has been flooded with funds following large inflows through the special FCNR(B) deposit scheme.
RBI’s special dollar-rupee forex swap facility for FCNR(B) deposits, Overseas Foreign Currency Borrowings (OFCB) and External Commercial Borrowings (ECB), launched on June 8 this year, has driven an unprecedented surge in foreign exchange inflows into the country to the tune of $73 billion in less than 11 weeks of the launch.
The response was strong enough for the RBI to advance the closure of the FCNR(B) window itself, from September 30 to August 31, having already achieved its objective ahead of schedule.
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