Foreign Exchange Reserves at the RBI hit $311 billion in the week ended 2 May as the dollar flirts with Rs. 60 again (this time on the downside).


This is only a near term high; in the longer term, we’ve owned much more in dollar terms:


Remember though that the RBI has forward obligations of around $32 billion. Meaning, the RBI has to return $32 billion as it has borrowed it temporarily (from NRIs, through banks).

Net of that obligation, we have reserves of about $280 billion. This seems to now consist mostly of currency (dollar/yen/euro etc) and less of other elements like IMF drawing rights or gold.


Finally, here’s the currency-only chart:


While we have $284 billion, if we backed out the $32 bn RBI has in forward obligations, then we have about $252 billion only.

Remember that an increase in forex reserves will eventually stoke inflation as more currency is printed by the RBI to increase their reserves. However, when reserves fall, inflation should fall, but it will cause a liquidity shock as banks must suddenly find money and interest rates will rise as they get more desperate.

What happens with the election results? Do more dollars flow in, resulting in higher reserves as the RBI tries to check the inflow by buying them? This will lead to high inflation as the rupees increase in the system.

Or does the dollar go back to the 55 levels? Export and import growth rates will change.

Or, in the bear case, where a government isn’t getting the majority, do the dollars flow out fast taking the rupee back down to 68?

We’ve got a week to know the election results and around a month to know the answer to the above questions. You can bet though, that whatever happens, there will be seriously volatilty in the reserves and the dollar exchange rate.

Now, tell them about it: