India foreign reserves moderate in Oct, driven by outflows of maturing foreign currency non-resident deposits

Foreign reserves in India moderated for the week ending October 7, from a level of record-high the previous week, largely driven by outflows of maturing foreign currency non-resident deposits. Also, The Reserve Bank of India has been wrapping up its forward positions, as noticeable in the fall in its net outstanding position during the month of August.

India’s foreign reserves moderated by USD 4.3 billion to USD 367.6 billion in the week ending Oct 7. As has been noted earlier by DBS Group Research, the central bank has built reserves to minimize volatility from the mismatch between forward purchases and maturing deposits.

Further, September trade balance widened modestly to USD8.3 billion from -USD6.7 billion during the period of April-August as a 4.6 percent lift in exports was offset by a shallower -2.5 percent fall in imports, compared to Apr-Aug’s -16 percent. Moreover, both oil and non-oil imports gained ground and gold imports particularly were up a strong 60 percent from the month, before while down on the year. Upcoming festive season and the recent fall in global prices is further expected to spur demand and claim a mark in the purchase of the yellow metal, DBS reported.

The RBI let long USD positions unwind to lift foreign reserves until September in preparation for the maturities in 4Q16, which are now set to moderate over the next two months before stabilizing. Encouragingly, the RBI has been proactive on its domestic liquidity stance and is therefore, likely to continue with stealth easing though more open market operations.

While the wholesale price index softened on an annual basis, heavy-weight manufacturing inflation climbed, underscoring the nascent improvement in the manufacturers’ pricing power. With an eye on the WPI indices in the rear view mirror, policy decisions are likely to primarily take direction from CPI trends, where the direction will be favorable over the next few months.

Meanwhile, policymakers are also expected to balance rate easing against demand dynamics in the pipeline and likelihood of U.S. rate normalization before year-end, the report added.