An SDR booster from IMF puts India’s forex kitty at $633 billion

by Business | 04-09-2021 | 212 views

India’s foreign exchange reserves rose to a record $633 billion in the week ended August 27 after the International Monetary Fund (IMF) made an allocation of 12.57 billion special drawing rights (SDRs), equivalent to $17.86 billion, to the country on August 23.

The fresh SDR allocation to the Reserve (RBI) follows the recent G-20 decision to increase IMF’s lending capacity by $650 billion to fight the economic fallout of Covid-19.

India’s allocation is in proportion to its IMF quota, 2.75%. Reserves rose $16.6 billion from the previous week — among the highest increases in a week since the 2008 financial crisis. At $633 billion, India’s reserves are reckoned to be fourth largest after Japan, China and Switzerland.

“The additional SDR allocation to India comes at a time when RBI’s foreign reserves are already very large and adequate,” said Rahul Bajoria, chief India economist at Barclays Capital. “This should boost RBI’s confidence around reserve adequacy at the margin.” The special drawing right is the IMF’s internal accounting currency unit for member countries.

2-way Intervention

SDR is expressed in dollars for valuation purposes. It’s a weighted average of a basket of currencies, including the dollar, yen, pound, euro and renminbi. Though it’s not traded like other currencies, its value changes along with that of the currencies in the basket.

This rise could be a challenge for the RBI’s reserve management, some experts said. India has been seeing a surge in dollar inflows for over a year now since the pandemic through a variety of sources — portfolio flows, foreign direct investment and commercial borrowings. Analysts expect the central bank to continue with a strategy of two-way intervention — buying and selling as needed.

“We think RBI will mostly engage in two-way FX intervention with an active bias towards keeping INR somewhere in the middle of the EM (emerging markets) pack,” according to a report by Emkay Global Financial Services.

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