India's central bank would seek to keep its stash of foreign exchange in excess of $600 billion to provide adequate cushion through the current commodities super-cycle, record inflation in the West and the Ukraine war, potentially halting sell-buy currency swap deals hitherto used to suck out excess rupee liquidity.
"The central bank does not want forex reserves to fall below $600 billion. This will show India's strength amid a war," said a top central bank observer.
Robust foreign exchange reserves are expected to burnish India's relative appeal as an investment destination amid the ongoing global liquidity tightening.
"Foreign portfolio investors are seen exiting the emerging markets amid global uncertainties," said Kunal Sodhani, associate vice president, Shinhan Bank.
"Crude oil again started rising higher reflecting commodity market worries with the ongoing Russia-Ukraine war. It is natural for the RBI to retain strong forex reserves, which puts India in a better position among global peers," he said.
To this effect, the Reserve Bank of India (RBI) is likely to stop doing sell-buy swaps under which the central bank sold dollars in the spot market at a specified rate, only to buy from the forwards.
A bank participating in such an auction window is expected to return the dollars after the contract period offered by the RBI.
CRR Hiked to 4.50%
As the central bank plans to discontinue this tool, it has instead announced a 50-basis point rise in the cash reserve ratio (CRR) with effect from May 21 to suck out Rs 87,000 crore from the inter-bank market as part of its ongoing gradual liquidity withdrawal plan.
One basis point is a hundredth of a percentage point. CRR, now at 4.50%, is the portion of bank deposits kept with the RBI earning no interest.
India's foreign exchange reserves got depleted by nearly $35 billion since the Russia-Ukraine war broke out. Forex reserves stood at $597 billion at the end of April 29, as against its record level of $642.453 billion seen on September 3 last year. India's reserves cover nearly 12 months of imports. India is the fifth biggest holder of forex reserves at $600 billion with Russia holding the fourth rank at $607 billion, show data .
Read more at: https://economictimes.indiatimes.com/news/economy/policy/rbi-may-aim-for-forex-reserves-above-600-billion/articleshow/91388663.cms
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