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March 21st 2005

India’s FOREX reserves hit new highs

India’s forex reserves set a new record. At $140 Billion, the reserves are now the 6th largest in the world. The record is due mostly to foreign capital inflows, which also continue to set records. Foreigners are pouring money into Indian stocks and bonds, in search of the typically high returns that emerging markets offer. Not only have share prices reached new highs, but so has the value of the Indian Rupee.

India derives much of its economic growth from growth in the export sector. Thus, the Reserve Bank of India has been working overtime to ‘sterilize’ the exchange rate, and prevents India’s exports from becoming too expensive. This sterilization typically assumes the form of buying bonds from the public, which increases India’s money supply. However, this increase in the money supply can spur inflation, and India cannot afford this. Nonetheless, India will likely continue to sterilize for as long as it can, taking cues on exchange rate manipulation from its neighbor to the North. Reuters reports:

They say signs China is still reluctant to allow its tightly pegged currency to strengthen had hardened the resolve of countries like India to keep their currencies under check.

Read More: India’s forex reserves peak to $140 billion

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Posted by Adam Kritzer | in Exotic Currencies | 2 Comments »

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2 Comments of “India’s FOREX reserves hit new highs”

  1. Reema Says:

    India will take a cue from China, if it has to compete with China in exports. Reserve Bank of India cannot keep buying dollar and artificially inflate USD/INR for long.

  2. Forex India Says:

    To prevent rupee from further appreciating, RBI needs to intervene in the forex markets and buy dollars, thereby increasing the demand for dollars. Now if RBI has to buy dollars it would need to sell rupees, right? So there would be more currency (rupees) in the system. If there is more money in the system then inflation will rise. This is because inflation in crude terms occurs because of “lots of money chasing few products”, thus driving the prices of products up.
    Hope this helps.
    Preeta@ 4xindia.com

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