India’s biggest jump in foreign-exchange reserves in two years offers the nation greater ammunition to support the rupee as U.S. policy makers debate when to pare back monetary stimulus.
The reserves rose $6.7 billion in October to $283 billion, the steepest monthly increase since 2011, after central bank Governor Raghuram Rajan offered concessional dollar-swaps for lenders to spur inflows. Bank of America Merrill Lynch estimates they will reach $305 billion by the end of March, the month the U.S. Federal Reserve is forecast to pare bond purchases.
“Building reserves strengthens India’s balance sheet,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Singapore. “That should help prevent excessive volatility in the rupee when the U.S. tapers, even as India still needs to curb risks from budget and trade deficits.”
A stable exchange rate would help contain the cost of imports as Rajan fights Asia’s fastest consumer-price inflation to protect the more than 800 million Indians living on less than $2 per day. The rupee has climbed about 8.5 percent since slumping to a record low in August, when speculation of Fed tapering as early as the following month led investors to pull billions of dollars from emerging markets.
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