Mumbai: As the central bank continues to increase forex reserves by running down the forward book which totalled $42 billion as of end-July, signalling its strong resolve to build a bigger reserve cushion to aid its expansionary, unorthodox monetary policy, the reserves are set to top the $655-billion-mark by March, according to a report.
The forex kitty declined by $2.10 billion to $619.365 billion for the week to August 13 due to a fall in the core currency assets and gold, showed the latest RBI data. The reserves had risen to a lifetime high of $621.464 billion in the previous reporting week ending August 6.
While foreign currency assets, the biggest component of the reserves, declined by $1.358 billion to $576.374 billion in the reporting week, the value of the gold reserves slipped by $720 million to $36.336 billion. RBI bought record gold in the past year, up over 27 per cent in two years at over 705 tonnes. At around $620 billion, the reserves can cover 16 moths of imports.
One of the main tools that the Reserve Bank has been using to shore up the reserves in recent months has been running down its forward book, which totalled $42 billion as of end-July, it said.
"We believe this shift is important as it signals that the RBI wants a bigger reserve cushion so it can run the expansionary, unorthodox monetary policy. Given the strength of capital inflows and the shrinking forward book, we raise our foreign reserves forecast to $655 billion by March 2022, from $645 billion earlier," Barclays India chief economist Rahul Bajoria said in a note on Monday.
It seems, the report said, the RBI has grown more comfortable in recycling its forward book back into its balance sheet, boosting the reserves significantly. Indeed, from an elevated $74.2 billion in end-March, the forward dollar holdings were down to $49 billion by end-June, a trend expected to continue through Q3, it added.
At the same time, RBI's domestic assets have also grown rapidly under the GSAP programme, the report said.
One of key objectives of the monetary authority to build up the reserves is to prevent the rupee from rising o the back of a significant balance of payments surplus, irrespective of whether the surplus has been driven by the current account balance or large capital inflows.
Meanwhile, the report pegged the rupee to trend between 75.5 and 80.7 to the dollar by March 2022. The continuing forex build-up, which got accelerated after RBI Governor Shaktikanta Das assumed office early December 2018, is also reflective of the central bank's need for a weaker rupee in light of the rapid growth in RBI's balance sheet due to massive OMO purchases and forex reserve accretion.