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Reserve Bank of India (RBI)’s pace of building foreign exchange reserves might slow down in 2015, unless the limit of foreign institutional investors (FII) in government securities is increased and equities continued to perform.
Last year, RBI added $24 billion to foreign exchange reserves as the central bank kept absorbing the FII flows from domestic markets through state-run banks. In the last week of December 2014, the reserves were $319.71 billion, against $295.71 billion in the week ended 2013.
The rise in reserves of $ 24 billion on a year-on-year basis is the highest since 2009. In 2009 RBI had added almost $29 billion to its reserves.
Foreign exchange reserves are now very close to the all-time high level which was seen in the week ending September 2, 2011 at $320.79 billion. However, despite reaching an all-time high in 2011, the year had ended at foreign exchange reserves worth $ 296.69 billion in end 2011. In 2014 it was the first time when RBI's foreign exchange reserves had ended above the $300 billion mark.
“If government bond limit is opened up, then FII flows will continue to come,” said Jayesh Mehta, managing director and country treasurer at Bank of America-Merrill Lynch. “In FY15-16, bond limits may be opened up more.
The next year’s borrowing programme will be starting from April. Maybe that could be one thing. Secondly, we need to see what happens in the Budget and how the equities market reacts to the Budget and the India growth story.
The FII limit in government debt, worth $30 billion, is nearly full. Because of this, interest has been shifting to corporate debt, where limits are not near exhaustion.
Net investments by FIIs in 2014 were $26.25 billion in debt and $16.16 billion in equities.
Ashutosh Khajuria, president (treasury), Federal Bank, said: “Within capital account, we may have reallocation happening where the FII money may get substituted by foreign direct investment (FDI). Even if another $4-5 billion foreign exchange reserves are added, it will be a very healthy foreign exchange reserve to maintain, if there is no fear of the reserves depleting.”
“We may see more of FDI coming into India. The current foreign exchange reserves position is comfortable,” he added
After the end of the two-day policy meet last month, the US Federal Reserve had said it can be “patient” in its approach to raising the benchmark lending rate from a range of zero to 0.25 per cent, where it has been since December 2008.
But despite that, there were concerns that once the rate increase cycle begins in the US, these FIIs might start pulling out from emerging markets and India will not be an exception.
