Forex kitty swells by record $5 bn in a week

The first week of February 2007 saw probably the highest-ever increase in the country's foreign exchange reserves, with the Reserve Bank of India (RBI) buying large amounts of foreign currency to stem the appreciation of the rupee.

In the week ended February 9, forex reserves increased by a record $5.03 billion to $185.07 billion on heightened inflows because of overseas borrowings, foreign direct investments, and portfolio investments.

With this, the country's foreign exchange reserves have increased by almost $35 billion since April 2006, which could be one of the highest annual accretions.

The easing of rupee liquidity because of the RBI's intervention in the foreign exchange market resulted in the central bank raising the cash reserve ratio (CRR) by 50 basis points to 6 per cent, to partly neutralise the impact. CRR is the percentage of deposits banks are required to maintain as interest-free cash balances with the RBI.

The increase in the CRR, effective in equal phases from February 17 and March 3, would suck out Rs 14,000 crore of rupee resources from the banking system, against an infusion of around Rs 22,000 crore because of the interventions in the foreign exchange market.

"This (the high intervention in the foreign exchange market) is one of the primary factors for the RBI increasing the CRR on February 13," Bank of Baroda's Chief Economist Rupa Nitsure-Rege said.

FIIs bought shares worth $640 million during February 5-9 after the government announced higher-than-expected GDP growth estimate of 9.2 per cent for 2006-07.

The high level of capital inflows has definite implications for a sharp jump in the money supply. Year-on-year money supply growth was at a high of 21.3 per cent on February 2, 2007, against 16.1 per cent a year ago.