India's foreign exchange reserves breaks records again

[Kickstarter101]

MUMBAI: India's foreign exchange reserves continued their trend, rising $1.3bn to reach a record high of $361.6bn, for the week that ended April 22 said the Reserve Bank of India.

A section of the market attributed the rise to the fact that the RBI has continued to buy dollars on account of Rupee being on an appreciating mode.

However, with improving macro-economic situation of the country and on hopes of a good monsoon, foreign investors have pumped in dollars into the system.

As per NSDL data, foreign institutional investors have become net buyers by investing Rs 14,834 crore in the month of April.

Link

 

[Stephen Cohen]

They will dip soon when some Advance payments for arms purchases will be made

Rafale ; S 400 ; Su 30 ; Submarines ; Chinook and Apache
and many other small items have to be paid for

 

[Kickstarter101]

Why does the RBI not allow the Rupee to become stronger? Why do they keep it artificially low?

 

[Skull and Bones]

Should cross $400 billion by the end of this fiscal year.

 

[Stephen Cohen]

Why does the RBI not allow the Rupee to become stronger? Why do they keep it artificially low?

To help exports and exporters to compete
Also to keep a curb on non essential imports like Gold

Export margins are very less any way and the market is very competitive
If an exporter feels he is loosing money he will loose interest in the business
and the country will suffer

 

[Immortan.Joe]

They will dip soon when some Advance payments for arms purchases will be made

Rafale ; S 400 ; Su 30 ; Submarines ; Chinook and Apache
and many other small items have to be paid for

Foreign exchange is not used for making payment on defence deals. It is in control of central bank and exist in order to defend currency and pay for the debts that are being called. Financing of defence deals are done by normal banking channel with government borrowing dollars for short term to be repaid at a later date. Foreign exchange may indirectly come into play to defend currency so that it does not depreciate, if GoI buys dollar/Euro from market, but governments (at least those with good record which again is dependent in part on foreign exchange) do not buy foreign currency from open market to finance these deals. The banks of country which is selling you its product also extend a short term loan (less than a year) in order to provide you with working capital so that there is not a massive draw of seller's currency in one go ,something which if not controlled would cause exchange rate fluctuations.

Why does the RBI not allow the Rupee to become stronger? Why do they keep it artificially low?

It would harm exports. Both appreciating and depreciating currencies are bad for business (depreciating more bad than appreciating as it reduce your asset value). Central banks try to hold a currency at an stable condition.

The current slide of Ruppe for past 3.5 years or so is due to RBI not buying dollars from market when Rupee appreciated to 35 Rupees in dollar in around 2009-10 (I don't remember exactly) so that ruling congress could show a low deficit and mask the harmful effects of its dole program. RBI should have gone on a buying spree of dollar when Rupee was strong thus building reserves and bringing down Rupee to its natural state of 45-50 Rupee per dollar. It would have also stopped slide of Rupee below $60 mark later.

 

[Stephen Cohen]

Foreign exchange is not used for making payment on defence deals. It is in control of central bank and exist in order to defend currency and pay for the debts that are being called. Financing of defence deals are done by normal banking channel with government borrowing dollars for short term to be repaid at a later date. Foreign exchange may indirectly come into play to defend currency so that it does not depreciate, if GoI buys dollar/Euro from market, but governments (at least those with good record which again is dependent in part on foreign exchange) do not buy foreign currency from open market to finance these deals. The banks of country which is selling you its product also extend a short term loan (less than a year) in order to provide you with working capital so that a massive draw of seller's currency in one go does not cause exchange rate fluctuation.

The payments for Government Imports ---are made by the RBI
( The main import done by the Government
is defence )

Infact during the mini crisis of 2013 when India's forex reserves DIPPED to 300 Billion
That time even OIL imports were being financed by RBI directly to
curb speculation in the open market

RBI does nt exist only to settle debts

 

[AyanRay]

Why does the RBI not allow the Rupee to become stronger? Why do they keep it artificially low?

Promoting export is one of the reason. Another major reason is to keep the currency stable. It is easier to keep an undervalued currency stable than a overvalued one. Remember its not the exchange rate of an currency which denotes the strength of a currency, but its stability, eg look at Yen. (Investors invests in country which has a stable currency and its exchange rate eventually rises).

Foreign exchange is not used for making payment on defence deals.

OK, the flow goes like this. The govt will pay for the defence imports through the tax and non tax revenue it earns, which are in rupees. It sells the rupees to RBI or other banks to purchase dollar to pay to the exporters.