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RBI To Recoup Forex Reserves Despite Being On US Watch List

According to BofA Merrill Lynch Global Research, the Reserve Bank of India (RBI) is in a position to be able to recoup its forex reserves even though the United States has added it to its watch list.

The approach that the RBI will take is to keep buying US dollars to add to the reserves when the dollar is weak, then aim for an exchange rate of Rs 65-66 against the US dollar when it starts to recover.

RBI is expected to follow through with this policy even though it remains on the currency practices and macroeconomic policies watch list.

The United States recently added India to its watch list of countries who have been taking steps that could be considered as currency manipulation. The warning signs for this were clear in 2017, when New Delhi kept increasing its foreign currency purchases throughout the year. These purchases were noted as unnecessary and had no visible purpose. Some of other countries that have been added to the US watch list include China, South Korea, Japan, Switzerland and Germany.

According to a data analysis, India has been purchasing a lot of foreign currencies since late 2013. This was done by the RBI to build an external buffer against the expected large market outflows that would happen globally.

Overall, the RBI has been very successful. As of April 6 of this year, India's forex reserves hit a record high of $424.864 billion. These forex reserves passed the $400 billion mark in September 2017 but there have been fluctuations since then.

The Times of India

Three Reasons Why RBI Can Recoup Losses

The global brokerage cited three reasons for RBI being able to recoup its forex reserves.

  1. India’s forex reserves are not sufficient.
  2. The second reason is that India’s forex purchase has not approached 2% of the nation's GDP which means that India cannot be formally named a currency manipulator.
  3. Indian government will want the RBI to keep on accumulating forex reserves to ensure that the rupee remains at a stable price.

Analysts expect that the rupee will reach an exchange rate of 64.25 to the US dollar by the end of the year. Earlier this week, the rupee actually weakened to 65.81. This was thanks to the increased demand for US dollars by importers and banks.


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