Revaluation crimps forex reserves

India's foreign exchange reserves dipped by $1.26 billion to $118.32 billion in the week ended July 30, 2004, from $119.58 billion in the week before, according to the weekly statistical supplement released on Saturday by the Reserve Bank of India (RBI).

The sharp fall in reserves is mainly of account of revaluation of reserves and the persistent RBI intervention in the forex market to support the depreciating rupee said a treasury head with a private bank.

The rupee fell on Monday to 46.39/41 on dollar demand from state-owned banks. It had closed last week at 46.33.

It has suffered on account of a slow down in capital inflows, losing more than 6 percent from the 51-month closing high of 43.5450/5500 on April 7, he added.

According to treasury head of a bank, the reserves have fallen as an impact of revaluation as both pound sterling, yen and euro over a couple of week's time have depreciated sharply against dollar.

The banker is of the view that since 70-80 per cent of the reserves is on account of trade flow and is to be maintained in dollars, it could be assumed that over 25-30 per cent of the reserves are maintained in euros and pounds. Therefore, with a depreciation in the euro and pound, the fall in reserves is quite natural, he said.

However, dollar sales is yet to impact money market liquidity because the RBI is receiving repo bids worth Rs 8,000-9,000 crore every day and the amount outstanding at the window is around Rs 53,000 crore.

Participants, however, are preferring to remain liquid "" as can be seen from the fact that the cash deposit ratio for the week ended July 23 has risen to 5.38 per cent against 5.02 per cent the fortnight before.

A dealer said banks and primary dealers are chary of investing in even gilts as they fear a depreciation in portfolio with inflation hovering at 7.5 per cent.

The investment -deposit ratio of the banking sector has fallen from 46.60 to 46.40. Most banks are preferring to invest in commercial paper and similar short-term papers.

As on July 23, outstanding investments in commercial papers stood at Rs 86,280 crore, an increase of over Rs 266 crore.