The Hindu Business Line : Huge forex reserves is handy tool for RBI

The RBI sources said that this estimate was inclusive of all the swaps it had been carrying out in the domestic foreign exchange markets. The swaps - - purchases of forward dollars and simultaneous sale of spot - - are to ensure that the rupee does not appreciate too fast and also to contain the liquidity overhang in the money markets. As per the last weekly statistical bulletin, the reserves were estimated at $81.672 billion.

The RBI sources dismissed reports that the build-up of reserves was due to hot money flows from non-resident Indians. The sources said that analysis of the inflow data had indicated that the bulk of the flows were in the form of current account flows, including non-debt creating capital account flows

The RBI sources also refuted speculation in the financial markets that for the maintenance of such large foreign exchange reserves, the central bank was incurring losses. This speculation had come about in view of the cost of the open market operations as measured by the repo rate and the earnings from US Government securities, where the bulk of the reserves are invested. Rates on US Government securities are presently in the region of about 2 per cent.

In fact the sources said the RBI had earned profits in excess of $2.5 billion in portfolio management of the country's international assets.

This management involved constant shuffling of its portfolios on a real-time basis. As a result, the sources said the actual returns in rupee terms were close to about 8 per cent, implying that it was earning a positive spread.

The sources also said that this portfolio management and its aggressive interventions would continue. This was to ensure that rupee value and the forward premiums' rise were kept within acceptable limits.

Following the aggressive interventions by RBI, the rupee appreciation during the last one-year has been contained at about five per cent. Some of the other Asian countries currencies have shown much higher rates of appreciation than the rupee, despite their weak balance of payments position.

The interventions had resulted in correcting the downward pressure on rupee dollar forward premiums. Forward premiums for six months are now in the range of 2.5 per cent for six months to a year.

Forward premiums had come below one per cent during the last few weeks as a result of large current account flows.

Accordingly the central bank has also warned corporates from taking large unhedged exposures in the foreign exchange markets including taking foreign currency loans.

The sources said these exposures would lead to losses, if the forward premiums rose in the markets, as a result of the sterilisation operations.

Banking sources said that the RBI interventions had somewhat dispelled exporter worries over earnings. Exporters' earnings have been hit due to the rising rupee and the higher inflation rate of 5.8 per cent within the country.

Banking sources also said that interventions had also resulted in breaking the free fall in securities yields in the domestic financial markets.

This was because the interventions had resulted in mopping up of liquidity in the markets. Accordingly, there was the possibility of a period of stability in yields at the current levels.

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