Forex reserves cross $ 40 bn for first time

Forex reserves cross $ 40 bn for first time
ENS ECONOMIC BUREAU

MUMBAI, JAN 6: India's foreign exchange reserves ended calendar 2000 at a record high after a year of sharp ups and downs. The Reserve Bank of India (RBI) said foreign exchange reserves stood at $40.008 billion (around Rs 1,86,877 crore) on December 29, above $40 billion for the first time, and up $201 million from a week earlier, and $5.073 billion from December 31, 1999.

In a year when the rupee plumbed record lows and ended nearly seven per cent weaker against the dollar, reserves hit new peaks thanks mainly to inflows from an overseas deposit issue. Increased corporate inflows also helped boost the reserves, traders said.

Analysts said the recent gains of the euro and sterling against the dollaralso helped boost reserves. The central bank said variations in reserves also reflected changes in the value of the rupee against other currencies such as the euro, sterling and yen which are also part of the reserves basket. But the extent of the adjustment was not known since the compositionof the reserves is not revealed.

Reserves have been climbing since early November after inflows from an overseas deposit offer from the State Bank of India (SBI). The SBI's India Millennium Deposits scheme raised some $5.5 billion. It helped reverse a steep fall in reserves which had been depleted by central bank efforts to meet dollar demand-supply mismatches after the rupee came under pressure from high oil prices and sluggish foreign capital inflows.

A sharp increase of foreign fund flows into the stock market in January-April, when net inflows totalled $1.69 billion, had helped the reserves touch $38.341 billion in mid-April, a record high at that time. But foreign fund inflows slowed subsequently and combined with a steep surge in crude oil prices to put pressure on the rupee, which fell more than seven percent to its lifetime low of 46.92 per dollar in October.

This in turn forced the central bank to intervene, and reserves were down by some $3.5 billion by early November. The rupee, which is convertible only on the current account, has recovered some of its losses and ended Friday at 46.71/72.

Besides the SBI deposit inflows, companies and exporters have also stepped up remittances in recent weeks, thanks to an improved outlook for the rupee after global oil prices softened. Oil prices have now dropped some more than $10 per barrel from decade highs hit last year.

Analysts said the increased reserves would help the central bank ward off any unexpected threat to the currency.

Jalan non-committal on interest rates

PUNE: Reserve Bank governor Bimal Jalan warned on Saturday that there were "a lot of considerations" to take into account before his bank could follow the example of the US Federal Reserve and cut official interest rates.

But Jalan said the country's interest rate environment was positive, and it was up to commercial bankers to take decisions on changes in their rates. "The interest rate environment is very positive as you have seen in the bond market. Bond yields have been going down," Jalan told reporters ata function at the National Institute of Bank Management in Pune.

The yield on 10-year federal bonds has fallen about 11 basis points sinceWednesday, before the Fed's half point rate cut. "I would like the bond yields to be softer," Jalan said. Since the Fed cut rates on Wednesday, local debt traders have been speculating that the RBI will also effect a rate cut. "There is no direct impact. There are a lot of considerations before there is a rate cut," Jalan said, when asked about the impact of the Fed's move.

The bank rate is the rate at which the central bank offers most of itsrefinance to commercial banks. Commercial banks use the rate to determine their lending rates. "The bank rate is currently at eight percent which is similar to the inflation rate," Jalan said.

"It is now up to the banks to decide on a change (in interest rates)," hesaid. Analysts say the headline inflation rate, which is currently at 5-yearhighs, and a high fiscal deficit are the bigest obstacles for the centralbank in reducing interest rates in the near term.

A senior RBI source said the level of the bank rate would be discussed by the central bank next week but changes were unlikely immediately. "We are not mulling any interest rate cuts till at least the budget. Even if the Fed lowers its rates further, we will have to wait for some more time," he said.

India's union budget is customarily presented to the lower house ofparliament in the last week of February. Analysts have argued that India needs lower interest rates to revive a flagging economy. The country's largest state-run banks currently charge their best customers a prime lending rate of 12 per cent.

India is currently experiencing a manufacturing slowdown and mosteconomic forecasters including the central bank have lowered their GDPgrowth estimates for 2000/01 (April-March) to around six percent fromearlier estimates of seven. Jalan said Friday's partial rollback of currency support measures would not be followed by further steps.