India’s biggest jump in foreign-exchange reserves in two years offers the nation greater ammunition to support the rupee as U.S. policy makers debate when to pare back monetary stimulus.
The reserves rose $6.7 billion in October to $283 billion, the steepest monthly increase since 2011, after central bank Governor Raghuram Rajan offered concessional dollar-swaps for lenders to spur inflows. Bank of America Merrill Lynch estimates they will reach $305 billion by the end of March, the month the U.S. Federal Reserve is forecast to pare bond purchases.
“Building reserves strengthens India’s balance sheet,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Singapore. “That should help prevent excessive volatility in the rupee when the U.S. tapers, even as India still needs to curb risks from budget and trade deficits.”
A stable exchange rate would help contain the cost of imports as Rajan fights Asia’s fastest consumer-price inflation to protect the more than 800 million Indians living on less than $2 per day. The rupee has climbed about 8 percent since slumping to a record low in August, when speculation of Fed tapering as early as the following month led investors to pull billions of dollars from emerging markets.
The Fed will pare the monthly pace of bond buying to $70 billion at its March 18-19 meeting from the current $85 billion, according to the median of 32 economist estimates in a Bloomberg News survey on Nov. 8. Policy makers unexpectedly refrained from tapering at their meeting in September.
The rupee, down 14 percent in the past 12 months, weakened 0.7 percent to 63.695 per dollar at the close in Mumbai. The S&P BSE Sensex share index fell 1 percent, while the yield on the 7.16 percent government bond maturing in May 2023 rose to 9.05 percent from 8.95 percent yesterday.
The currency has fallen this week after U.S. jobs data bolstered the case for the Fed to trim stimulus. U.S. payrolls rose 204,000 in October, almost twice as much as economists surveyed by Bloomberg predicted, a report showed Nov. 8. The rupee has also been pressured after the Reserve Bank of India cut direct dollar supplies to oil refiners.
Reports today signaled India’s expansion remains subdued and that price pressures are intensifying.
Industrial output rose 2 percent in September from a year earlier, less than the median estimate of 3.5 percent in a Bloomberg News survey of 37 economists. Consumer-price inflation accelerated to 10.09 percent last month, the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
Rajan has raised the benchmark repurchase rate twice since becoming RBI governor in September, to 7.75 percent, as he seeks to reduce price pressures.
The concessional swaps window he announced after taking charge has garnered $17.5 billion so far, the RBI said yesterday. The facility is due to close on Nov. 30.
India’s foreign-exchange reserves were at $281 billion as of Nov. 1, according to the central bank. That’s the smallest in the BRIC group, which also includes Brazil, Russia and China.
China has $3.66 trillion of foreign reserves, Russia about $514 billion and Brazil $376 billion.
“Building ammunition gives a sense of comfort to the markets,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. At the same time, a bigger stock of reserves only buys time as Indian policy makers must achieve structural improvements in the economy, she said.
Prime Minister Manmohan Singh’s government has pledged to narrow the budget shortfall to a six-year low of 4.8 percent of gross domestic product in the year ending March. The administration estimates the gap in the current account, the broadest measure of trade, may narrow to about $60 billion.
India has boosted levies on gold imports three times in 2013 to try and curb inward shipments. Those steps are part of a wider push by Singh to revive an economy that HSBC Holdings Plc estimates will expand 4 percent this fiscal year, the weakest pace since 2003.
The premier’s drive received a boost yesterday, when PepsiCo Inc., the world’s largest snack-food maker, said it will invest more than $5 billion with its partners in India by 2020.
“The RBI has done well in building reserves,” said N. R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi. “But there are challenges like inflation and the deficits which still need sorting.”
Elsewhere in the Asia-Pacific region today, China elevated the role of markets in the nation’s economic strategy after President Xi Jinping oversaw a gathering of Communist Party leaders to chart a course for his decade in office.
In Indonesia, the central bank unexpectedly raised the benchmark interest rate by a quarter of a percentage point to 7.50 percent, the highest level since 2009.
Meanwhile, Philippine Finance Secretary Cesar Purisima said areas in the nation affected by Typhoon Haiyan may see output drop by 8 percent to 10 percent in 2014, while adding the country has fiscal space for rebuilding and relief work.