RBI to keep enhancing forex reserves cover: Bank of America- Merrill Lynch

August 4, 2014

As per a report by Bank of America- Merrill Lynch, the Reserve Bank of India (RBI) will continue to buy dollars to increase the foreign exchange reserves to further support the country’s import cover.
The forex reserves decreased to $ 320.564 billion in the week to July 25, 2014 significantly lesser than the all-time high of $ 321 billion in September 2011.
As per the report:

RBI is likely to continue increasing forex to protect against contagion.
RBI needs to raise $ 80 billion to maintain the current import cover of 8 months by March 2016.
In May and June 2014, the central bank had bought $ 28.3 billion of forex forwards.
This completely covers RBI’s short outstanding forwards position including the $ 26 billion of FCNR-B (Foreign Currency Non-Repatriable) swaps.
The government and the RBI are expected to launch another bulk forex scheme to further enhance foreign exchange reserves.
The government could raise investment limit in government securities by another $ 5 billion to $ 30 billion, replacing the $ 5 billion reserved for sovereign wealth funds and others, within the overall FII debt investment limit of $ 81 billion to increase reserves.
It may also exercise the option of listing government securities in a growing market bond index to raise $ 20-25 billion from benchmark funds that track that index.

The government could also issue sovereign bonds or quasi sovereigns to raise $ 5-8 billion capitalizing on the Modi government’s solid political mandate, to bolster the reserves.

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