RBI’s forex reserves are up to a record $347 billion, including its known forward exposure. In data released today, RBI’s forex numbers came in at another $2.4 billion higher, which is likely to be because the RBI is buying dollars like there’s no tomorrow. Also imports seem to be lower than expected, so there must be pressure on the rupee to rise since forex inflows from Foreign Institutional Investors seems to be quite high.
This has been scary in the past, as dollar purchases from the RBI causes inflation in India. (Because it prints rupees, and the printed rupees come into circulation, which instantly gets multiplied because Indians are starved of credit, and that means now there’s a lot more rupees out there and not quite enough of stuff to buy, which means prices go up)
RBI also released more data about how much it actually bought. RBI’s forex reserve data may not tell us that because it may own Euros which, if they appreciate against the dollar, will cause the dollar based forex reserve look higher without actual RBI buying. The actual data of buying is released with a lag of two months. In Jan and Feb 2015, the RBI has bought $12 bn and $7.8 billion respectively!
There’s only one scary part about this: Inflation. RBI has been printing to buy dollars recently, so why isn’t there any inflation? Answer: because it’s not allowed rupees to go berserk, in terms of higher money supply. RBI has been selling rupee bonds and putting the rupees out that it gets of circulation. But not any more.
(RBI owns rupee government bonds because it buys them once in a while, typically as “OMO” operations or as part of deals it makes in the market. It holds these bonds on its balance sheet as part of its long term assets.)
There’s a very good reason that inflation will hit us in a few months, because the RBI has recently changed; it’s no longer selling any more rupee bonds. But we’re going to have to leave that part for a more detailed Macroeconomic piece in Capital Mind Premium.