A sharp dip in forex reserves of almost $63 billion in India during the last six months to $246 billion now has raised some concern in the government. However, according to finance ministry officials, almost $30 billion or half of the depletion in reserves is on account of revaluation, or what is called losses due to mark-to-market. India’s forex reserves are deployed in various international currencies, predominantly US dollar, euro, yen and sterling. A sharp appreciation of the dollar against the euro or sterling will result in a reduction in the value of these currencies in dollar terms.

“We are looking at the balance of payments position in a fairly intensive manner — whatever major dip or decline had to happen has already taken place. We have a general fix on the global oil prices now and do not expect the BoP to be very negative going forward after factoring in the capital outflows,” the Finance Ministry official said.

CEO of ICICI Bank K V Kamath said it made sense to have a stand-by line of credit when one is available. “It gives dollar access without necessarily putting reserves on the line,” he said. According to him, India has a one-year liability of $65 billion, including NRE deposits of $35 billion and suppliers credit of $15-20 billion.

Another economist with a foreign institutional investor who did not wish to be named said, “Even Singapore has copious reserves, but it negotiated a swap with the US.” Given the way countries are trying to coordinate policies and currency movement, a swap gives a little bit of more comfort to investors. “Technically, when corporates convert rupees to dollars, RBI can use the swap,” he said. Essentially, these are instruments that act as good deterrents.

... contd.