RBI’s forex reserve could swell to $655 billion by March: Report

The central bank has been running down its forward book to accumulate forex reserves. The forward book totalled $42 billion at the end of July.

RBI’s forex kitty had risen to a lifetime high of $621.464 billion during the week ending August 6.

A larger reserve will help the RBI in tackling global uncertainties at a time when central banks in some of the advanced countries are considering to wind down loose monetary policies.

In a note, Barclays India chief economist Rahul Bajoria said, “We believe this shift is important as it signals that the RBI wants a bigger reserve cushion so it can run the expansionary, unorthodox monetary policy. Given the strength of capital inflows and the shrinking forward book, we raise our foreign reserves forecast to USD 655 billion by March 2022, from USD 645 billion earlier.”

It seems, the report said, the RBI has grown more comfortable in recycling its forward book back into its balance sheet, boosting the reserves significantly. Indeed, from an elevated USD 74.2 billion in end-March, the forward

holdings were down to USD 49 billion by end-June, a trend expected to continue through Q3, it added.

At the same time, RBI’s domestic assets have also grown rapidly under the GSAP programme, the report said.

One of key objectives of the monetary authority to build up the reserves is to prevent the rupee from rising o the back of a significant balance of payments surplus, irrespective of whether the surplus has been driven by the current account balance or large capital inflows.

Meanwhile, the report pegged the rupee to trend between 75.5 and 80.7 to the dollar by March 2022.

The continuing forex build-up, which got accelerated after RBI Governor Shaktikanta Das assumed office early December 2018, is also reflective of the central bank’s need for a weaker rupee in light of the rapid growth in RBI’s balance sheet due to massive OMO purchases and forex reserve accretion.

Another reason for the build-up is the fact that the central bank also faces a potential change in the quality of capital inflows, alongside relatively larger current account outflows. This may prompt a more interventionist approach, as the RBI looks to maintain a strong grip on the rupee while ensuring ample domestic liquidity, he said.

A third reason for the rising reserves is that the build-up is boosted by the recycling of forward positions into spot reserves and buoyant purchase of G-secs.

(With inputs from PTI)