INDIA BUSINESS WORLD - September 1^st - September 30^th - 2008

FOREX KITTY SHRINKS BY A RECORD $6.5 B

FOREIGN exchange reserves dipped by a record $6.5 billion during the week ended September 5, 2008 — the steepest weekly decline since December 2005. The decline followed dollar sales by the Reserve Bank of India (RBI) to meet exporters’ demand and also to prevent the rupee from slipping sharply against the dollar.

According to the latest data released in its weekly statistical supplement (WSS) released by RBI, total foreign exchange reserves, including gold and special drawing rights (SDR) — the currency with the International Monetary Fund (IMF) — dipped $6.5 billion during the week ended September 5. Almost the entire dip in reserves was on account of a sharp fall in foreign currency assets, which fell $6,491 million during the week, with the value of gold, and SDR in reserves unchanged during the week. However, the reserves with the IMF dipped $7 million.

In December 2005, the decline was an exceptional event, since RBI paid out dollars to meet the redemption proceeds of India Millennium Bonds. But this time round, the dip in reserves is rather secular. The country’s foreign exchange reserves have been falling since the beginning of the fiscal year. Since end-March, its forex kitty has shrunk by almost $21 billion. The dollar demand, particularly from oil producers, has risen sharply since early March, as global crude prices have been spiralling. Also, rising commodity prices have resulted in higher dollar demand from importers. On one hand, the demand for dollars has gone up. On the other hand, supply, in the form of inflows by foreign portfolio investors (FIIs) and through overseas borrowing, has significantly slowed down. As a result, the value of the dollar, too, has dipped by, at least, 10% during the period, according to an economist with a large private sector bank.

All is not too well with the government finances as well. After a gap of several weeks, the government has resorted to ways and means advances (WMA) - a temporary advance to meet its revenue mismatches. The government borrowed Rs 10,903 crore during the week ended September 5. One of the reasons for the reliance on WMA, according to an economist with an investment bank, is that the government needed money to pay the redemption proceeds of bonds maturing during the period. However, with another bond auction in the subsequent weeks, it would be able to pay back the money to the central bank from the subscription proceeds, he pointed.