RBI Building 'Strong Umbrella' Of Forex Reserves To Avoid Rains, Says Shaktikanta Das

The Reserve Bank of India is focused on building robust buffers of foreign currency reserves through its intervention in the dollar/rupee currency market, Governor Shaktikanta Das said in the monetary policy statement on Friday.

"It is our prime focus to build up a strong umbrella in the form of substantial quantum of forex reserves, which will help us when the cycle turns or when it rains heavily," Das said.

As of March 29, India’s foreign exchange reserves reached an all-time high of $645.6 billion, up $67.2 billion from a year ago.

Das recalled an instance when the foreign currency reserves had declined to $524.52 billion in October 2022, which had raised eyebrows about the country's ability to withstand external shocks. The reserves were at their lowest level since July 24, 2020, and it happened at a time when the Russia-Ukraine war was raging and there was a spike in crude oil prices across the world.

The governor, in his address on Friday, reiterated that the decline in forex reserves was partly due to changes in the valuation of foreign currency assets as well as market interventions "to ensure orderly depreciation of the rupee." Das also said that the central bank is mindful of the judicious use of its foreign currency buffers.

In terms of the rupee, the RBI governor said that the domestic currency has remained largely range-bound in FY24, in comparison with emerging market peers such as the Chinese yuan, Thai baht, Indonesian rupiah, Vietnamese dong and Malaysian ringgit. The rupee was most stable, falling by a mere 1.4% against the dollar, as compared with a few advanced economy currencies like the Japanese yen, Korean won and New Zealand dollar as well.

"As compared to the previous three years, the INR exhibited the lowest volatility in 2023–24. The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position," Das said in his speech.

On Friday, the rupee closed 15 paise higher at Rs 83.29 per dollar as currency market players drew comfort from the RBI's commentary on inflation and growth, according to bank treasury traders.

The speculation that the RBI has been intervening in the dollar/rupee market around Rs 83.40–83.45 a dollar over the last few days gave an indication that the rupee may not fall beyond these levels in the coming weeks, according to a senior Treasury official with a large private bank.

This led to traders unwinding their long positions built on the dollar through the week, which resulted in a stronger closing in the rupee on Friday.