India’s foreign exchange (FX) reserves may have vaulted over the $600 billion milestone in the week ended June 4, 2021.
The reserves jumped by $5.271 billion in the week ended May 28, 2021 to stand at $598.2 billion, as per the Reserve Bank of India’s latest weekly statistical supplement.
RBI Governor Shaktikanta Das underscored that emerging market economies have to build up their own buffers and India is no exception.
Das said: “After a risk-off period of retrenchment in April-May, the prospects for capital flows to India are improving again. While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance.”
Das observed that this has necessitated countervailing two-sided interventions by the central bank in spot, forward and futures markets to stabilise financial market and liquidity conditions so that monetary policy retains its domestic orientation and the independence to pursue national objectives.
Spike in forward premia
Thus, RBI actively engages in both purchases and sales in the foreign exchange market and its various segments.
“The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers. In the process, strength is imparted to the country’s balance sheet by the accumulation of reserves,” Das emphasised.
To a question on why forward premia spiked earlier and in the last three days came crashing down, Michael D Patra, Deputy Governor, said the forward premia are essentially a market outcome.
“Last time when the forward premia spiked, it was because of foreign investment in an InvIT (Infrastructure Investment Trust)….So, we watch these outcomes and stand ready to take countervailing action….as and when necessary,” Patra said.