The Reserve Bank is likely to continue buying dollars from market to add to its reserves in the coming months, which has crossed $300 billion, says a report.
"The RBI is likely to remain focused on building foreign reserves in the months ahead, with the present phase of spare capacity and weak demand conditions lowering the inflationary threat," DBS Bank said.
The forex reserves rose to $298.6 billion in the week ending March 21, which was the highest since December 2011 when it touched $300 billion. But the Finance Minister had on March 31 said that the reserves had crossed $300 billion by that day.
The reserves had surged to an all-time high of $322 billion in September 2011.
In a conference call with analysts, RBI Governor Raghuram Rajan had on Wednesday said at the current level of the rupee if there is a need to reduce volatility, the RBI may go to the market and buy dollars.
But in a media interview post-policy, Rajan had suggested that the comfortable reserve level could be around the Chinese levels, which is over $3.66 trillion as of end 2013, which is the world's highest.
The current rise in reserves is on account of absorption of inflows that followed RBI's concessional swap arrangement for banks and non-resident deposits coupled with strong FII interests in equities and debt.
According to the report, justification for higher foreign reserves also stem from the rise in external debt.
As of December 13, the country's external debt stock jumped to $426 billion, (23.3 per cent of GDP), from $405 billion in March 2013. Bulk of this jump is attributable to non-resident deposits, which rose sharply to $99 billion by late 2013, from $71 billion in March 2013.
"This sharp build-up was encouraged by the swap schemes announced by the RBI, to cushion the financing requirements for the current account deficit and stabilise the currency," the report said.
With reserves at 15 per cent of GDP, the gap between external debt is significant, the report said. However, near-term funding risks are limited as the more pertinent short-term external debt makes up only around 5 per cent of GDP, it added.
The DBS Bank's report said the active central bank presence is creating some unease in the market. "There is concern that the rupees injecting into the system could prove inflationary, if left unsterilised," the report said.
This is also relevant as the narrower trade and CAD have lowered the economy's absorptive capacity, it said. Between October and Dec 2013, the RBI was a net buyer of $17.5 billion in the spot market but built up nearly four times net sales in the forwards market.
