India’s foreign-exchange reserves rose to a record as policy makers looked to protect the economy against outflows from a probable increase in US interest rates.
Holdings climbed $2.7 billion in the week ended Jan. 16 to $322.14 billion, a Reserve Bank of India statement showed Friday.
Foreign funds, buoyed by near-zero borrowing costs in Europe and the US, poured $42 billion into Indian stocks and bonds last year.
India’s larger currency stockpile and narrowing trade deficit reduces vulnerability to external shocks, providing Governor Raghuram Rajan room to cut interest rates this month for the first time since May 2013. The increase in reserves over the past year is the fastest among the largest emerging markets, Bloomberg reported.
“It’s critical to augment reserves,” said Sujan Hajra, an economist at Anand Rathi Financial Services Ltd. in Mumbai.
“They will provide a buffer against a selloff when the Federal Reserve hikes rates or if there is more global turmoil.”
Indian Bonds
The rupee has surged about 12 percent from an all-time low in August 2013, when Morgan Stanley dubbed the currencies of India, South Africa, Brazil, Indonesia and Turkey as the “fragile five” because of their difficulties in drawing capital to finance deficits.
Since then, Rajan has lured inflows by offering discounted dollar-swaps to banks and overseas investors bought a record $26 billion of Indian bonds last year on optimism the most stable government in 30 years will help improve finances in Asia’s third-largest economy.
India’s foreign-exchange reserves rose about 10 percent in the past 12 months, while Brazil saw holdings decline by 0.4 percent to $374 billion and in Russia they fell by 28 percent to $339 billion, according to data compiled by Bloomberg.
China’s reserves rose 0.6 percent to $3.8 trillion.
The primacy of US-based funds in Indian debt may cause adverse effects in case of unexpected changes in US monetary policy, the Reserve Bank of India said in its financial stability report Dec. 29.
Foreign-exchange reserves provide the first line of defense against sudden outflows, executive director Deepak Mohanty said last year.
