Pace of accretion in forex kitty to slow down: DBS

The dip in foreign investor flows and the widening current account deficit will impact the forex reserves accretion, says a foreign bank.

"Looking ahead, the pace of reserves accumulation is likely to moderate on slower portfolio inflows and a wider current account deficit," Singaporean lender DBS said today.

It can be noted that forex kitty had touched a lifetime high of over USD 400 billion last month, but have fallen for three consecutive weeks after that.

The bank said any deterioration in the global risk- appetite will also require Indian authorities to dip into reserves to defend the rupee against market volatility, but added the current stock is "sufficient to cushion" against external vulnerabilities.

On the fund inflows front, it said the first half of the calendar year saw strong inflows from portfolio investors which averaged USD 3.8 billion per month till June, but the same came down to USD 0.4 billion in August and turned into a net outflow of USD 1.5 billion in September.

"Equity holdings were sold down. Flows into debt slowed as investment limits came close to being fully exhausted," it explained, adding 75 per cent of the investments this year were into debt markets.

On the risks from the current account deficit front, it said the gap has already widened to 2.4 per cent of GDP for the first quarter this year and is set to deteriorate to a four-year high for the fiscal.

"India will not have a narrower CAD to offset US dollar inflows this year," it said.

However, despite these risks, the country is better cushioned to handle the situation, it said, comparing the current situation with that of mid-2013 where India had faced maximum troubles due to the 'taper tantrums'.

It said the import cover on total reserves minus gold is comfortable at 10-11 times, better than the 7-8 times seen during the 2013, while the total external debt eased to 1.2 times of reserves from 1.3 times last year.

It can be noted that the reserves had to be deployed to defend the currency during the 2013 episode, which led the total forex kitty to dip down to USD 275 billion.

Widening CAD was one of the primary factors that led the rupee to become the weakest currency in the emerging world. AA BEN RMT BAS