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Rajan 'bullet-proofing' India - Outside View by Arvind Chari
Rajan 'bullet-proofing' India

The RBI under Rajan has read the external situation very well and has continued its FX reserves build up strategy. The RBI's total forward long position at the end of June 2014 stood at USD 39bln and thereby covering its entire forward liability as of date for 5 years ahead. This is a very significant outcome which will go a long way in instilling confidence in the Indian Rupee

Chart I: RBI buys up Dollars to re-build its Forex Reserves
(Source : RBI ; Quantum Data; Net Forwards are calculated only for upto 1 year)

Remember, the RBI had in between Sept-Dec 13 raised USD 34 bln from NRIs/foreign sources to boost its foreign exchange reserves. This had also helped stabilize the INR. (see the first oval in the chart) post the carnage of July and August 2013.

Between December 2013 and June 2014, not only have the oil companies repaid the RBI USD 12 bln that it had loaned it from its balance sheet; the RBI as also bought a massive USD 39 bln from the markets. Of that USD 22bln was bought in May '14 alone as foreigners renewed their long lost love for India post the decisive election mandate.

The red line in the chart depicts the FX reserves (net of any forward outstanding liability/asset upto 1 year). See how that line from being below the reported FX reserves (blue line) has shot up above in the last 3 months. This thus shows that from having a Net forward liability; the RBI now has net forward asset for upto 1 year. (The RBI owes USD 26 bln repayable between September 2016-November 2018. Accounting for this, the net Forward Position is only marginally positive).

This large buying has arrested the INR appreciation and rightly so as CPI REER still shows the INR over valued at INR=60. And more importantly, it has ensured a very stable and range bound INR movement in the last six months. This shows very prudent actions by the RBI and will go a long way in ensuring that we do not re-visit a situation like that of May-August 2013.

Although India is still not 'bullet proofed' from global concerns; but these moves must have given enough confidence to the RBI governor to suggest that 'as the tide turns; India would not be the one left naked'.

Arvind Chari is Head Fixed Income & Alternatives at Quantum Advisors Pvt Ltd and advises two India dedicated off-shore India fixed income funds. Arvind was previously the fund manager for the Quantum Liquid Fund and the Quantum Equity Fund of Funds at Quantum Asset Management Company Pvt Ltd.

The views expressed in the Article are the personal views of the author, Arvind Chari and not views of Quantum Advisors Private Limited (QAS). QAS may or may not have the same view and does not endorse this view.


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