Governor Das’ efforts since assuming office in December 2018, resemble those of the Bimal Jalan-YV Reddy era a decade ago when the reserves touched for the first time to adequately cover imports, and the reserves at over $516 billion are sufficient to buffer the economy against any contagion, Bank of America said in a report on Tuesday.
The present forex reserves are sufficient to cover 14.9 months of imports, which are around 20 per cent of GDP, said the report, adding pre-Covid, the import cover was 11.4 months. The higher import cover is also due to the falling crude prices.
Given the high forex cover, the report also assumes a flat current account provided oil averages at $43.7 a barrel for the year and FPIs pump in $7 billion of more through the course of the year.
“The record high forex reserves at $516 billion should enable greater portfolio inflows going ahead as adequate forex reserves reduce rupee risks on one hand and on the other, domestic corporates should be able to raise money abroad cheaper,” the report said without quantifying how much will the FPI inflows or how much the interest cost benefit would be.
Also, at the present level, forex kitty covers 88.7 per cent of foreign investments, and this can be 100 per cent if the reserves climb to USD521 billion. Higher FPI cover is thanks to the Sensex coming off 9.4 per cent so far this year, it added.
According to the report, the RBI has built adequate forex reserves after 10 years, when then governors Jalan and his successor Reddy were on a dollar buying spree and also calls upon the central bank to continue to buy forex when the dollar weakens and allow depreciation if it strengthens.
“The RBI can sell $50 billion to support the rupee on one hand and can also buy up to $45 billion during the course of the year if the dollar weakens,” said the report, pegging the rupee at 74 to the dollar by December.
“On balance, we continue to expect the RBI to continue its asymmetrical forex policy of buying when the dollar weakens and allowing depreciation if it strengthens. Our balance of payments estimates place FY21 forex intervention at $45 billion, of which the RBI has already done $25.5 billion so far”.
In FY2020, the RBI defended the rupee with a $45 billion war-chest, according to the report.
Noting that adequate forex reserves are key to higher foreign investments, the report said, “our eight-year call of the RBI rebuilding the reserves is finally coming true. After all, they are the nation’s only insurance cover against contagion. With governor Das buying $81 billion, the reserves are back to an adequate level, a la the Jalan-Reddy times, after 10 years.”
Had it not been for the pandemic, the reserves would have been $594 billion by now, which is two-times the Greenspan-Guidotti rule of short-term debt of one-year residual maturity, including FPI debt investments. At $516 billion this is only 1.8 times cover, said the report.
Stating that massive currency depreciation as seen during the global shocks of 2011, 2013 and 2018 is likely a thing of the past, the report concluded that “not surprisingly, the rupee has outperformed its peers like the currencies of Brazil, Russia, Turkey and South Africa during the pandemic shock.