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Forex reserves drop to $55.57 bn on RBI sales

India's foreign exchange reserves fell in the week to May 17, after rising for 32 straight weeks, confirming the market's belief that the Reserve Bank of India intervened when war fears were strong to steady a shaky rupee.

By May 17 -- three days after an attack on an Indian army camp in Kashmir by suspected Pakistan militants jolted financial markets -- the reserves fell $139 million to $55.573 billion, from the previous week's lifetime high of $55.712 billion.

The dip was mostly in the currency assets which fell $136 million to $52.433 billion, data from the Reserve Bank of India showed.

"The drop can be attributed to intervention by the central bank. It looked like it was selling dollars last week," said M R Madhavan, head of research at Bank of America.

The RBI, which has been buying dollars for most of the past year-and-half, absorbing strong capital inflows, reportedly turned a seller last week when war fears hit.

In the aftermath of the attack, bond prices fell around 2.5 per cent and the benchmark share index slid nearly 10 per cent.

But the rupee shaved off just 0.2 per cent, which traders said was because of central bank support.

War concerns have eased since Thursday on softer rhetoric from Prime Minister Atal Bihari Vajpayee and international efforts to diffuse tensions between India and Pakistan.

Vajpayee allayed fears of a full-scale war, telling a press conference in Kashmir he hoped for "clear skies" when reporters asked if he saw war clouds.

The markets are bouncing back.

The rupee has fully recovered, closing Friday at 48.9850/9925 per dollar, off its May 16 lifetime low of 49.08 and returning to levels it was at before the attack.

Tensions, however, still run high after a week of fighting across the ceasefire line in Kashmir.

RESERVES STRONG

The $139 million dip in the reserves is hardly a ripple.

But, should India face a more severe shock needing stronger intervention, analysts feel the reserves will withstand it.

"If tensions worsen, the reserves may be hit," said Siddharth Mathur, strategist with JP Morgan. "The strong growth trend may not be sustained. We could even see some depletion. But, I don't think the reserves are so volatile to see a substantial outflow.

The RBI does not reveal the composition of the reserves but analysts think "hot money" may not comprise much more than a fifth of the reserves.

In financial year 2001-02 (April-March), the reserves rose by around $12 billion to touch $54.154 billion on March 29, helped by strong capital inflows.

Analysts see more accretions in 2002-03 though the strength may be less.

"I expect the reserves to touch $60 billion by end March 2003 helped by a current account surplus and some direct and portfolio investments," Madhavan said.

Foreign investments in India so far are subdued at $622.8 million compared with the previous year's $2.8 billion.

But, analysts are hoping for a pick-up as the government pushes with reforms, particularly the privatisation process.

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