Forex reserves

Forex reserves rise to $273
MUMBAI: The frenetic build-up of forex reserves has lost pace with reserves growing by only $1.2 billion during the week ended November 30 to $273.5 billion. Of the $1.2-billion increase in reserves, $546 million came from an increase in the value of gold. The increase in foreign currency assets was just only $694 million.

The rush of foreign capital into the country has resulted in forex reserves swelling by an average of $2.3 billion a week since April. According to the figures released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS), foreign exchange reserves, including gold and SDR, grew $1.2 billion during the week.

It is after three months that foreign currency assets have slowed to less than a $1 billion in a single week. For one, after the Sebi tightened the norms for foreign investments through participatory notes (P-notes) in October-end, FIIs have gone slow in their investments. Also, inflows through the external commercial borrowings route has slowed down after the government imposed end-use restrictions on such borrowings.

FIIs were net sellers to the extent of over Rs 5,000 crore in November 2007. During 2007, FIIs were net sellers for only two months — August and November. Many reasons have been attributed for their net sales; the tightening of markets following the subprime crisis and also profit-booking by funds before they close their books for the year.
The slowdown is a relief for the RBI which was grappling with strong forex inflow, which has had an impact on domestic liquidity conditions as the inflow needs to be mopped up and an equal amount of rupee funds need to be released.

The RBI has the challenge of maintaining the desired level of liquidity in the market, which it has been through sale of bonds. But this too entails a cost as these bonds need to be serviced at fairly high rates.

As per the updated money supply figures, total stock of money in the system amounted to Rs 20,801 crore as on November 23. This represents a rise of Rs 4,595 crore over the previous fortnight’s levels. Both demand and term deposits rose Rs 4,427 crore and Rs 4,128 crore, respectively, during the fortnight, while the currency with the public dipped Rs 3,525 crore.

Even though absolute pile-up in the stock of money reflects a slowdown in the growth of money supply, an annual year-on-year growth in money supply works out to 22.8%, way above central bank’s comfort level of 17.5% for the year.

In other developments, the central government has refrained from resorting to ways and means advances (WMA) — a temporary loan from the central bank to meet its revenue mismatches — for yet another week. On the other hand, WMA to state governments rose Rs 41 crore to Rs 147 crore. The central government revenue surplus with RBI dipped Rs 815 crore during the week to Rs 16,768 crore.