Econintersect: The first dividend has been paid on the installation of Raghuram Rajan as Governor of the Reserve Bank of India. For October the central bank has reported the biggest jump in reserves in more than two years (up $6.7 billion to $283 billion). This increases the possibility that the decline in the rupee can be curtailed and possibly reversed, should reserves continue to grow. According to Bloomberg, Bank of America Merrill Lynch estimates that reserves will reach $305 billion by the end of the first quarter 2014.
If the BoA estimate is realized, that would constitute an increase of more than 10% in less than six months. However, for the week ending 01 November reserves fell $1.8 billion from the last week reported for October and stood at $281.3 billion. Following is the latest table released 08 November 2013 by RBI:
Reserves have fallen by more than 4% in the past year. The BoA projection for March 2014 would result from an increase not quite double the decline of the past year.
The performance of the Indian central bank and the rupee have been under close scrutiny since Rajan, a University of Chicago economics professor was named to be the new governor. Prior to Rajan’s arrival in August the rupee had been in free-fall since May, as shown in the graph below.
By the end of August and beginning of September the rupee hit a double bottom (peaks on the graph) at 68 rupees to the dollar and has since pulled back to between 61 and 64 for the past two months. If foreign exchange reserves can continue to grow to the levels suggested by Bank of America Merrill Lynch, the rupee could well rise into the upper 50s, getting back close to the level it saw in early 2013. This would ease the extreme pain the country has experienced with such trades as energy purchases on the international market.
Sources:
- Weekly Statistical Supplement (Reserve Bank of India, 08 November 2013)
- Rajan Spurs Surge in India’s Reserves to Support Rupee: Economy (Kartil Goyal, Bloomberg, 11 November 2013)
- India’s forex reserves down $1.65 billion to $281 billion (The Times of India, 09 November 2013)
- Rajan is New Governor of Reserve Bank of India (GEI News, 07 August 2013)