MUMBAI: The Reserve Bank of India has begun to shore up its sliding foreign exchange reserves as it bought the US dollars from the market for the first time in 28 months in March as overseas investors poured in seeking higher returns.
The central bank that has declared it would not intervene in the currency market to target a level for the currency, has bought $820 million in March, according to RBI data. It also purchased dollars in the forward market as outstanding forward sales dipped to $11 billion in March, from $12 billion a month earlier.
"We believe that the RBI, sooner or later, will need to take more pro-active steps to attract capital inflows. It has to eventually make up for not buying foreign exchange during the surplus capital inflow years of 2009 to the first half of 2011," said Indrani Sengupta, economist at Bank of America Merrill Lynch.
The central bank's reserves have been depleting as the country continues to consume more imported products than exporting. That led to the current account deficit rise to a record 6.7% of the gross domestic product in the December quarter. The foreign exchange which used to cover as much as 15 months of imports has fallen to just about 7 months.
But the return of P Chidambaram to the finance ministry has bolstered investor sentiment that has led to record foreign fund flows. Apart from helping bridge the current account deficit, the flows are being used by the central bank to improve its reserves.
Portfolio investments into the Indian debt and equity markets touched $31.8 billion between September 2012, when Chidambaram took charge of the finance ministry, and now. For FY13, inflows were at $30.9 billion. The accumulation of foreign exchange may be more to improve RBI's position than to intervene in the market to stabilise the currency.
The central bank had said it would not intervene in the market, not does it target a level for the rupee. "We don't use forex intervention as a measure of managing liquidity. Liquidity gets affected as a result of forex intervention," governor Duvvuri Subbarao said recently.
"We don't believe that we should intervene to build up the reserves. If the reserves can be built up as a consequence of intervention to curb exchange rate volatility, then that is an incidental by-product."