RBI aims to boost record high forex reserves: Report

RBI forex accumulation: In a bid to bolster its already impressive forex reserves, the Reserve Bank of India is committed to further accumulation, leveraging robust inflows into the country's equity and debt markets, news agency Reuters reported, quoting sources familiar with the institution's strategy.

The Reserve Bank of India (RBI), eyeing larger buffers, intends to continue absorbing Dollar inflows to prevent significant appreciation of the Rupee, despite the nation's thriving economy and favourable balance of payments, analysts noted.

As of March 15, the RBI's forex reserves soared to an all-time high of $642.49 billion, underscoring the central bank's resolve to fortify its monetary defenses.

A senior source knowledgeable about the RBI's stance remarked, "Reserves are just about adequate as per most of RBI's internally-monitored metrics while they are slightly below adequate on a couple of them. Exercise of building reserves will continue."

RBI Governor Shaktikanta Das emphasised earlier this year the imperative of reinforcing reserves to shield emerging market economies from global currency fluctuations.

The acceleration in reserve accumulation in recent months aligns with substantial Dollar inflows into Indian markets, particularly in equities and debt. The inclusion of Indian debt in the JPMorgan and Bloomberg emerging market debt indexes later this year is expected to sustain the influx.

B Prasanna, Head of Treasury at ICICI Bank, affirmed, "Given the external situation, India's forex reserves seem to be adequate to meet the needs of the economy and any external shock."

Reserve adequacy is commonly evaluated based on import cover and the capacity to cover short-term debt obligations. Prasanna added, "Even if the definition is expanded to include imports of both goods and services, India's import cover is at 9 months, which is far higher than the rule of thumb."

While India's reserves are deemed sufficient across various metrics, the RBI will opportunistically augment reserves on favourable buying opportunities, the report said, quoting a second source familiar with the central bank's strategy.

This proactive reserve-building approach is anticipated to curtail sharp appreciation of the Rupee, as highlighted by analysts and traders.

Barclays Investment Bank's projections forecast India's FX reserves surpassing $700 billion by the end of 2025, underscoring the nation's robust financial resilience.

Despite significant foreign investor activity in Indian equities and bonds in recent years, the Rupee has remained relatively stable against the Dollar, a trend facilitated by RBI interventions.

"As the size of Indian economy increases... FX reserves would have to keep pace with the size of the economy and markets," remarked ICICI's Prasanna.

(With Reuters inputs.)