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Strong FPI inflows, $5 billion liquidity boost push forex reserves to 10-month high

Sunny Verma, Sandeep Singh
Forex reserves are now highest since $413 billion recorded in the week ended June 8, 2018.

The country's foreign exchange reserves rose to a ten-month high of $411.91 billion as on March 29, as against $406.67 billion a week earlier, according to latest data released by the Reserve Bank of India (RBI). Record foreign portfolio investment (FPI) inflows and a $5 billion rupee-dollar swap window by the central bank added to the forex kitty.

Forex reserves are now highest since $413 billion recorded in the week ended June 8, 2018.

While forex reserves had hit a high of $426 billion in the week ended April 13, 2018, it witnessed a steady slide over the following months and went down to $392 billion in the week ended October 26 on account of the RBI intervention to manage the rupee, which slipped to all time lows in October 2018 following sharp rise in crude oil prices and outflows by foreign institutional investors.

In October last, the rupee had fallen to its all time low of 74.34 against the US dollar, in line with the rising crude oil prices, and the central bank had to intervene to stem the local currency's slide against the dollar following capital outflows from debt and equity markets.

Back then, the Brent crude oil prices had also hit a high of around $86 per barrel, putting pressure on the rupee and India's current account deficit.

A fall in crude oil prices in recent months and appreciation of the Indian rupee vis- -vis the dollar also helped in steady rise forex reserves in recent weeks.

Last Tuesday, the benchmark Sensex at the BSE had gained 185 points to close at an all-time high of 39,056.65, riding on continued buying by foreign portfolio investors and expectation of a rate cut by RBI in its monetary policy meeting - which was eventually cut by 25 basis points.

The broader Nifty at the NSE gained 44 points to close at 11,713, marginally short of its all-time high.

According to provisional data available at stock exchanges, the foreign portfolio investors invested Rs 543 crore in Indian equities last Tuesday, taking the overall inflow in April to Rs 10,094 crore. The net FPI inflow since February 1 this year now stands at a high of Rs 61,293 crore.

The strong FPI inflow also resulted into strong gains for the rupee which closed at 68.74 against the dollar, after rising 40 paise last Tuesday.

Since February 1, the rupee has regained Rs 2.2 or 3.1 per cent against the dollar.


Spike in crude prices may weigh on rupee adversely

While strong inflow of funds by foreign portfolio investors amidst expected slowdown in global growth has led to a rise in forex reserves as well as strengthening of rupee, a spike in global crude oil prices following supply cut by OPEC and sanctions by the United States on Venezuela may play the spoiler. However, market participants believe that the domestic economy is on a strong footing and expectations of political stability at the Centre have raised market sentiment.

While FPI inflow into equity markets in March this year alone amounted to Rs 33,980 crore - the largest monthly inflow in the stock market's history - the 30-share Sensex has grown 3,189 points or 8.9 per cent since March 1, 2019.

The previous high was Rs 30,906 crore in March 2017. After taking into account the Rs 13,000 crore investment in the debt market, the total FPI inflow for March so far works out to Rs 43,450 crore.

The appreciating rupee also increases returns on foreign investors pumping money in Indian markets, as it helps boost their returns in dollar terms.

A rupee-dollar swap by the RBI last month also added to the forex reserves. In order to inject rupee liquidity, the RBI on March 26 conducted an auction to buy $5 billion from the market and simultaneously sell it back to the same counterparties effective March 2022.

The amount of dollars that has been mopped up via these operations will reflect in the banking regulator's foreign exchange reserves for the tenor of the swap while also reflecting in RBI's forward liabilities.

Meanwhile, the system gets rupee equivalent liquidity for the same amount and for the same duration. The central bank will conduct a similar swap again on April 23.