A strengthening dollar has led the Reserve Bank of India to propose an increase in the share of the greenback in the country’s foreign currency reserves.
The High Level Strategy Committee (HLSC) meeting in December 2014, chaired by the RBI Governor Raghuram Rajan and attended by Finance Secretary Rajiv Mehrishi, and RBI Deputy Governors H R Khan and Urjit Patel, decided to revise the currency benchmark, and suggested that the ratio of dollar reserves be raised by 10 percentage points — from the current upper limit of 57 per cent to 67 per cent.
“The committee discussed a proposal to revise the currency benchmark in view of developments in the currency markets in recent months and the divergent monetary policy outlook in advanced economies. After detailed deliberations, the committee approved the revision in currency composition,” said the note prepared by Khan.
India has exhausted the limit available for dollar reserves in normal circumstances. As per data in the note, while dollar holding has been earmarked at between 43 per cent and 57 per cent (with an emergency leeway of ±10 per cent), reserves amounted to 57.82 per cent of forex reserves. HLSC has now proposed to raise the share of the dollar to 60±7 per cent.
Experts feel that with the dollar appreciating against the euro and other currencies, having reserves in those currencies would bring down the overall value of reserves.
The euro has depreciated by almost 16 per cent against the dollar in the last six months, and the share of euros in total forex reserves has hit the lower side of the designated limit — it stood at only 13.28 per cent of the portfolio; the allowed range being 12 per cent to 22 per cent.
While raising the dollar’s share by 10 percentage points, the committee decided to trim the shares of the Australian and Canadian dollars by 5 percentage points each.
After US dollars and euros, the British pound has the third share of between 8 per cent and 18 per cent of forex reserves. Though the pound has depreciated by almost 14 per cent over the last six months, RBI has decided to increase the limit for sterling reserves by 1 percentage point on the upper side.
A report prepared by Mecklai Financial Services earlier had pointed out that since most of the trade-based invoicing and external debt is in US dollars, India must have higher reserves in dollars.