India's Dollar Swap Window May Lift FX Reserves Toward Record

(Bloomberg) -- The Reserve Bank of India's brand new liquidity-management tool -- a dollar-rupee swap window -- is likely to lift the country's foreign exchange reserves toward record highs, helping it tide over external risks, economists at HSBC Holdings Plc said in a note.

The success of the $5 billion of three-year swaps in March prompted the RBI to announce another auction for a similar amount and tenor in April. With robust foreign inflows expected into local assets, chances are high the RBI may conduct a few more.

Read: India to Repeat $5 Billion Forex Swap After Successful Auction

“These swaps have the advantage of adding to the stock of RBI's spot FX reserves,” Pranjul Bhandari, chief India economist at HSBC, said. “Because three years is a sizable time -- enough to potentially ride out a full Fed tightening cycle -- this accretion to spot reserves is meaningful from an adequacy perspective.”

That doesn't mean the RBI should stop outright dollar purchases, she said.

India's foreign exchange reserves were at $412 billion rupees in end-March, which Bhandari says is enough to cover more than 10 months of imports. Last year, the RBI had to draw down significantly from its reserves, depleting it to $392 billion in October from a record $426 billion, to defend the rupee amid a surge in prices of oil, India's biggest import, and the dollar's rise.

Foreign inflows chasing higher yields in India saw a revival in early 2019, but policy makers are wary about their reversal.

“From this perspective, an additional $20 billion of reserves, taking overall holdings to $430 billion, would provide an extra, useful cushion in a world of increased financial volatility,” Bhandari added.

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Abhay Singh

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