New Delhi — India’s foreign exchange reserves climbed to a record $729.3 billion in the week ended Aug. 21, strengthening the Reserve Bank of India’s ability to manage pressure on the rupee amid high oil prices and global economic uncertainty.
Data released by the RBI on Friday showed reserves rose by $12.4 billion during the week, surpassing the previous record of $728.5 billion set in February.
The increase was supported by strong foreign currency inflows following measures introduced by the central bank in June to attract overseas capital. The initiatives included a special deposit program aimed at overseas Indians and other non-resident customers.
Those measures generated about $72.8 billion in inflows through Aug. 21, bolstering India’s external position and reducing the risk of a third consecutive year of a deficit in the country’s broadest measure of capital flows.
The larger reserve cushion also gives the RBI more room to intervene in currency markets if needed. The rupee has recovered about 1.7% from a record low reached in May but continues to face pressure from elevated crude oil prices and India’s reliance on imported fuel.
However, attracting overseas deposits carries significant costs. Under the special diaspora deposit program, the RBI is covering banks’ hedging expenses, allowing lenders to offer more attractive interest rates to overseas customers.
Those costs are higher than they were in 2013, when the central bank last relied heavily on overseas resident deposits to strengthen its foreign exchange reserves, largely because U.S. interest rates are now significantly higher.
The RBI typically invests the dollars raised through such programs in relatively low-yielding assets. Analysts have said the gap between investment returns and the cost of raising the funds creates a substantial “carry cost,” estimated at about $5.7 billion annually.
Earlier this month, the RBI moved up the closing date for the special diaspora deposit program after inflows exceeded expectations. RBI Governor Sanjay Malhotra said demand for the program had been stronger than anticipated. (Source: IANS)
