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Weak dollar bloats forex reserves by 20 pc

Harish Damodaran

Inflows from conventional sources have either been negative (external assistance and external commercial borrowings), lower (foreign investment) or marginally higher (Non-resident deposits).

NEW DELHI, April 3

The US dollar's substantial decline against the euro and other major international currencies has contributed to more than a fifth of the increase in the country's foreign exchange reserves during 2002-03.

This is corroborated by the RBI's latest balance of payments (BoP) `flow' data for April-December 2002, which provides disaggregated information on forex inflows and outflows under the current as well as capital account heads, resulting in a net accretion (or draw-down, in the event of outflows exceeding inflows) to the central bank's reserve kitty.

The `flow' data shows that the country posted a current account surplus of $ 2.82 billion during the first three quarters of the fiscal just ended. This, along with net capital inflows of $ 9.75 billion and `errors & omissions' of $ 132 million, led to an increase of $ 12.70 billion in RBI's forex reserves between April and December 2002.

However, the $ 12.70-billion reserve build-up computed from the BoP `flow' data works out to be lower than the accretion figure, derived from the `stock' data reported in RBI's Weekly Statistical Supplements (WSS).

The stock of foreign currency assets with RBI rose from $ 51.05 billion in end-March 2002 to $ 66.99 billion in end-December, amounting to an increase of $ 15.94 billion.

Since the `stock' data, unlike the BoP `flow' figures, takes into consideration the appreciation/depreciation of non-US currencies in RBI's overall reserve holdings, the difference — $ 3.24 billion — represents the impact of the dollar's weakening vis--vis the euro, yen and the pound sterling over this period.

In the past, the gap between the `stock' and `flow' data was not pronounced because the bulk of forex reserves were held in the form of dollars. But with RBI's reserve portfolio now including a sizeable holding of non-US currencies, the dollar's rise or fall makes tremendous difference to the valuation of the central bank's reserves.

Moreover, the magnitude of the dollar's depreciation during April-December 2002 was significantly large — 16.2 per cent against the euro, 11.1 per cent against the yen and 10.7 per cent against the British pound.

While the dollar's weakening has contributed to $ 3.24 billion or 20.3 per cent of the almost $ 16 billion forex reserve build-up during the first nine months of 2002-03, the remaining increase has come from the current account surplus of $ 2.82 billion and net capital inflows of $ 9.75 billion, with their respective shares being 17.7 per cent and 61.2 per cent.

But even here, it is interesting to note that of the total net capital inflows of $ 9.75 billion, nearly $ 7.5 billion has been attributed to `other banking capital' and `other capital'.

On the other hand, inflows from conventional sources have either been negative (external assistance and external commercial borrowings), lower (foreign investment) or marginally higher (Non-resident deposits).

According to the RBI, `other banking capital' basically comprises assets and liabilities of authorised dealers and movement in balances of foreign central banks and multilateral institutions (World Bank, ADB, etc) maintained with the RBI. The reasons for these inflows more than doubling to $ 4.42 billion during April-December 2002 is not fully clear though.

As regards the residual `other capital' inflows, these mainly pertain to delayed export receipts, arising from the leads and lags between physical shipment of goods and the receipt of funds through banking channels. It is surmised that the rupee's strengthening against the dollar would have prompted exporters to bring in their proceeds (which were being held abroad), manifesting, in turn, as higher delayed export proceeds.

Whatever be the explanations given, the fact remains that `non-conventional' factors — a weak dollar, `other banking capital' and `other capital' — have together accounted for roughly 67 per cent of the accretion to the country's forex reserves during 2002-03.

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