India's forex reserves crossed the $400-billion mark for the first time on Friday. The latest $100 billion has been added to the reserves in three and a half years after they crossed the $300-billion level on April 2014. At current level, the reserves are enough to fund more than a year of imports. In nominal terms, foreign exchange reserves have increased by $6.6 billion during the first quarter. The reserves have risen by $30 billion since Urjit Patel took charge as RBI governor in September 2016.
An increase in these reserves provides the RBI with ammunition to tackle volatility in the forex market. The forex reserves are built up by the central bank by purchasing dollars from banks. The reserves -which comprise foreign currency assets, gold and special drawing rights with the International Monetary Fund -stood at $400.7 as on September 8.
The highest contribution to the reserves has been from foreign portfolio investors. During the April-September quarter, foreign direct investment surged by $7.2 billion in the reporting period from $3.9 billion in the same period last year. Foreign institutional investment flows increased by $11.9 billion in the first quarter from $1.2 billion in the same period last year.
The central bank's buildup of reserves comes ahead of the US Federal Reserve exiting its stimulus -a move which is expected to result in funds moving back into US dollar assets. Accretion to reserves are expected to slow down with a widening of the CAD and rising crude oil prices. Foreign institutional investors have pulled out $810 million from the equity market in September on the back of $1.7 billion in August.