India Need To Beef Up Reserves To Stabilize Rupee

India’s weakest economic growth since 2009 escalates pressure on the government to increase the smallest foreign-exchange reserves among BRIC nations, as policy makers struggle to contain a sliding rupee.

The reserves have dropped 13 percent to $278 billion since a peak in 2011 and are equivalent to less than seven months of imports. Bank of America Merrill Lynch estimates India needs as much as 10 months of import cover for currency stability, a figure still about half the average in Brazil, Russia and China.

Prime Minister Manmohan Singh’s potential options to shore up confidence in the rupee include issuing India’s first dollar sovereign bonds, a deposit program to tap the country’s diaspora and bilateral currency-swap agreements. Boosting reserves could avoid the need to support the currency with further interest-rate increases that risk damaging efforts to revive investment.

“India needs to explore all possible funding options,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. Rate increases may deter some capital inflows by worsening India’s slowdown, she said.

The rupee has slumped 17 percent versus the dollar in 2013 as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus.

Bloomberg

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