Forex reserves jump by $ 717 mn

According to the RBI, forex reserves started picking up during the fortnight ended January 23, when reserves grew by $ 369 million to $ 23.8 billion. It may be recalled that one major reason for the recent fall of the rupee was the decline in dollar inflows. Furthermore, the RBI — before tightening the liquidity — had sold dollars to prevent the rupee from crashing further against the dollar.

As a result, forex reserves had gone down from the $ 30 billion levelto around the $ 27 billion mark last month. "Adding to the woes, investments by FIIs also came down. In fact, there was a net outflow of FII fund in the last three months. Moreover, the Concor GDR issue was postponed just before the roadshows were to start in overseas markets," said a source.Now the situation has changed. Reserves have now started moving up after the RBI started buying dollars in the spot market to prevent the appreciation of the rupee against the greenback. The rupee has strengthened from Rs 40.4 on January 16 to Rs 38.65-70 on February 6. Forex reserves declined in four successive weeks beginning December 26, 1997 when foreign currency assets aggregated $ 24.17 billion. Thereafter, assets declined to $ 24.06 billion on January 2, $23.72 billion on January 9 and $ 23.43 billion at the time the central bank announced the hike in bank rate and cash reserve ratio.

Analysts attributed the rise in the forex reserves to the RBI intervention in the forward market. The Reserve Bank on January 23started entering into buy/sell swaps with banks. Through this, the apex bank bought spot dollars from the banks and sold dollars in the forwards, in a bid to cool the forward markets. This was reversed on February 3 after liquidity in the system saw speculators mounting an attack on the rupee.

"Through this strategy, the RBI had killed tow birds with one shot. It not only made the rupee strong by buying dollars, the call money rates also declined as the central injected an equivalent amount of rupees into the system," said a banker. However, he cautioned the RBI by saying, "it’s a dangerous game. The forward premium is ruling at a high level. The RBI will have to honour the commitment by paying back the dollar at a future date."Money supply during the fortnight ended January 16 went up to touch 16.6 — up from 15.5 in the previous fortnight. This can be attributed to the fact that the net foreign exchange assets of the banking sector which stood at 22.8 per cent during the fortnight ended January 2, grew to23.6 per cent for the fortnight ended January 16.

Net bank credit during the fortnight ended January 16 stood at Rs 3,00,940 crore, up from Rs 2,93,461 crore on December 26, indicating a rise of 2.3 per cent. Aggregate deposits during the same period grew to Rs 5,64,580 crore, registering a 1 per cent rise in the fortnight.