“The central bank does not want foreign exchange reserves to fall below $600 billion. This will show India’s strength in the midst of a war,” a senior central bank watcher said.
Strong foreign exchange reserves should enhance India’s relative attractiveness as an investment destination in the context of the current tight global liquidity situation.
“Foreign portfolio investors are seen exiting emerging markets amid global uncertainties,” said Kunal Sodhani, Associate Vice President, Shinhan Bank.
“Crude oil has started to rise again, reflecting concerns in the commodity market with the ongoing Russian-Ukrainian war. It is only natural that the RBI maintains strong foreign exchange reserves, which puts India in a better position among its global peers,” he said.
To this effect, the Reserve Bank of India (RBI) should stop doing sell-buy swaps under which the central bank would sell dollars in the spot market at a specified rate, only to buy forward.
A bank participating in such an auction window would have to return the dollars after the contractual period offered by the RBI.
CRR increased to 4.50%
As the central bank plans to abandon this tool, it instead announced a 50 basis point increase in the cash reserve ratio (CRR) with effect from May 21 to suck Rs 87,000 crore from the interbank market as part of of its current program. cash withdrawal plan.
A basis point is one hundredth of a percentage point. The CRR, now at 4.50%, is the interest-free portion of bank deposits held with the RBI.
India’s foreign exchange reserves have been depleted by nearly $35 billion since the start of the Russian-Ukrainian war. Foreign exchange reserves stood at $597 billion at the end of April 29, down from their record high of $642.453 billion recorded on September 3 last year. India’s reserves cover almost 12 months of imports. India is the fifth-largest holder of foreign exchange reserves with $600 billion, with Russia ranked fourth with $607 billion, the data shows.