Forex reserves lose shine as gold prices plummet

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SME Times News Bureau | 10 Aug, 2015
Weakening gold prices and a strengthening dollar dented Indian foreign exchange reserves (Forex) in the week ended July 31.

Forex reserves for the week under review plunged by $187.6 million and stood at $353.46 billion.

The reserves had reported an increase of $322 million to $353.64 billion in the previous week (July 24). The growth that time had come after four consecutive weeks of decline.

The data furnished by the Reserve Bank of India (RBI), in its weekly statistical supplement, showed that India's forex reserves were negatively impacted by devaluation of gold prices.

"There was a good build-up in reserves due to the efforts of RBI in buying dollars. The plunge in gold prices washed out those gains," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told agency.

The Reserve Bank is pretty active in the forward purchase markets since the last 20-22 months. It sells dollars, whenever the rupee crosses the Rs.64 mark and buys when it falls below Rs.63 to a dollar.

Though at a very short range, experts believe that RBI seems to be comfortable with the rupee ranging anywhere between Rs.63.20-Rs.64.30 per dollar.

The RBI's strong control over the rupee has given the currency strength and resilience to withstand international financial crisis like the recent Greece debt issue.

Due to the central bank's efforts, the foreign currency assets (FCAs) which constitute the largest component of forex reserves, rose by $629.9 million and stood at $329.87 billion.

"The FCA grew despite the fact that major global currencies like Euro depreciated against the dollar," Banerjee said.

Nearly 20-25 percent of Indian reserves are made up of non-dollar currencies. The individual movements of these currencies against the dollar impacts the overall reserve value.

"However, the plunge in gold prices had the biggest negative impact on the reserves," Banerjee elaborated.

The country's gold reserves plunged by $824.2 million to $18.25 billion in the week under review. The reserves were stagnant at $19.34 billion since the week ended May 1.

Gold reserves in the world's largest gold consuming nation constitute nearly 15 percent of forex.

Recently, international gold prices have been steadily declining as the dollar has been getting stronger in anticipation of a US interest rate hike which is due in September.

From a peak of $1,900 an ounce in September 2011, the spot gold price slumped to a five-year low of $1,086 an ounce on August 6, 2015.

Experts say that after oil prices plunged by 50 percent over the current year, it is now the turn of gold to lose its shine.

With higher interest rates in the US, the FPIs (Foreign Portfolio Investors) will be led away from investing in commodities like oil or gold and equities in emerging markets such as India.

However, the special drawing rights (SDRs) were slightly higher by $4.9 million to touch $4.02 billion.

The country's reserve position with the International Monetary Fund (IMF) inched up by $1.7 million to $1.30 billion.