By Jaspreet Kalra and Swati Bhat
MUMBAI (Reuters) - India's central bank will keep building its forex reserves as it seeks to build larger buffers and strong inflows into the country's equity and debt markets give it an opportunity to do so, two sources familiar with the bank's thinking said.
The Reserve Bank of India's absorption of dollar inflows will indirectly prevent a sharp appreciation of the rupee, despite high growth in the economy and a positive balance of payments, analysts said.
The Reserve Bank of India's (RBI) FX reserves rose to a record high of $642.49 billion as of March 15.
"Reserves are just about adequate as per most of RBI's internally-monitored metrics while they are slightly below adequate on a couple of them. Exercise of building reserves will continue," a senior source aware of the RBI's thinking said.
The RBI did not immediately respond to a request for comment.
RBI chief Shaktikanta Das said in January that the bank had embarked on strengthening and building higher reserves, which was essential to insulate emerging market economies from spillovers of global currency fluctuations.
The pace of reserve-building has picked up in recent months with large dollar inflows being witnessed into equity and debt markets. With Indian debt getting included in the JPMorgan and Bloomberg emerging market debt indexes later this year, flows are expected to continue.
RESERVE ADEQUACY
"Given the external situation, India's forex reserves seem to be adequate to meet the needs of the economy and any external shock," said B. Prasanna, head of treasury at ICICI Bank.
Adequacy of foreign exchange reserves is typically judged by the import cover, or the number of months of goods imports the reserves can finance, and also whether they are enough to cover the country's short-term debt obligations.
"Even if the definition is expanded to include imports of both goods and services, India's import cover is at nine months which is far higher than the rule of thumb," Prasanna said.
With reserves seen as adequate on many metrics, there was no need for the RBI to aggressively build reserves, but the central bank would continue to "opportunistically increase the reserves on good buying opportunities," a second source familiar with the RBI's thinking said.
Reserve building was likely to limit sharp gains in the rupee, analysts and traders said.
The rupee slipped to a record low on Wednesday and the RBI likely stepped in to prevent further sharp losses.
The RBI's intermittent dollar sales are unlikely to run down its reserves massively, said Robert Carnell, regional head of research, Asia-Pacific at ING Bank.
Barclays Investment Bank's baseline projections show India's FX reserves rising to above $700 billion by the end of 2025.
While foreign investors net bought a total of $28.7 billion worth of Indian equities and bonds over 2023, the rupee remained in a tight band between 83.42 and 80.88 against the U.S. dollar with its volatility hitting decadal lows on the back to persistent RBI interventions.
In the same time period, the RBI was a net buyer of dollars having added $18.1 billion to its pile.
"As the size of Indian economy increases to $5 trillion by FY27 and subsequently to $7 trillion by the end of this decade, FX reserves would have to keep pace with the size of the economy and markets," ICICI's Prasanna said.