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RBI needs to fortify forex reserves further by $20 billion: HSBC

RBI needs to fortify forex reserves further by $20 billion: HSBC

Wed Apr 10 2019

 

This would be a halfway climb to the record $450 billion reserves the country held last year, says the report

 

An additional $20 billion of foreign exchange (FX) reserves, which will take India’s overall holdings to $430 billion, would provide an extra, useful cushion in a world of increased financial volatility, according to a research report by HSBC.

 

This would be a halfway climb to the record $450 billion reserves India held in early 2018.

 

“The RBI’s new FX swaps, of course, help in this regard. But, when possible, it may be a good idea to continue with outright dollar purchases alongside,” suggested Pranjul Bhandari, Chief Economist, India; Aayushi Chaudhary, Economist; and Deep Nagpal, Associate, in their report.

 

The study found that India faces challenges on two metrics — short-term external debt cover (reserves/ short-term debt ratio) and short-term external debt plus current account deficit cover (reserves/ STD + CAD ratio).

 

“We scale up FX reserves until India fully meets those criteria as well. That number, as per our analysis, is $430 billion, about $20 billion more than current levels,” said HSBC’s economic research team.

 

Pointing out that India had reserves of $450 billion in early 2018, the report said the subsequent draw-down in reserves helped to anchor the country’s external position during the time of heightened global financial volatility.

 

Increasing reserves halfway, from $410 billion now, to $430 billion may thus offer some benefits in the future.

FX swaps

 

Referring to the Reserve Bank of India’s new scheme of buying dollars from banks for three years and offering them rupees in return (via USD/INR buy/sell auctions), HSBC said this move will inject liquidity into the banking system, while raising foreign exchange reserves.

 

“One can argue that they subtract an equal amount from the forward book, because they have a maturity of three years, and therefore, on net, do not lead to any increase in overall foreign exchange reserves.

 

“Yet, because three years is a sizeable time (enough to potentially ride out a full Fed tightening-cycle), this accretion to spot reserves is meaningful from an adequacy perspective, in our view,” said the report.

 

HSBC’s research team believes that the RBI would be served well to continue outright dollar purchases alongside foreign exchange swaps. That would hold it in good stead over the medium term.

 

Source: https://www.thehindubusinessline.com/

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