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RBI added $8 bn in reserves in 01/02: Reddy

The Reserve Bank of India has absorbed capital flows of $8 billion in the current financial year, a senior official said on Monday.

India's foreign exchange reserves rose for the 23rd straight week topping $50.744 billion in the week ended March 1, a rise of $8.8 billion in the past 12 months.

The rise is mainly due to higher overseas portfolio investments, increased foreign direct investments and a rise in remittances by expatriate Indians, analysts and traders say.

Delivering a keynote address at the Asian Bond Conference in Bangkok, Deputy Governor of the Reserve Bank of India Y V Reddy said large capital flows also limited the central bank's scope to conduct borrowings.

"When capital flows occur and the capacity to monetise government debt is circumscribed by sterilisation, the maneuverability to conduct market borrowing is constrained."

"To meet externally induced shocks in the forex markets, the RBI had in the past conducted extraordinary operations and in the process considered it essential to create a firewall to prevent transmission to the bond market," Reddy said.

He said these firewalls had given rise to expectations amongst bond traders who hope that whenever there is action by the central bank in the foreign exchange market, liquidity conditions in the money market would be impacted.

Indian bonds have witnessed an unprecedented rally with yields touching record lows in February on expectations of lower interest rates and comfortable liquidity conditions, which some analysts say was mainly because the central bank stayed away from sterilising the huge capital flows.

Calendar on the way

Reddy said a government securities calendar for primary issues for the first half of the next financial year 2002/03 (April-March) would be announced soon but added there were problems in announcing a time table for the full year.

"Large market borrowings and uncertainties in cash flows make issuance of a full-fledged calendar somewhat difficult at this stage," Reddy said.

In his Budget speech on February 28, Finance Minister Yashwant Sinha had said the central bank would soon be issuing a calendar for dated government securities to help investors and to add transparency and stability to the market. The central bank already has a calendar for treasury bills.

The government's net market borrowing programme for the next financial year is pegged at Rs 958.59 billion and traders say a calendar will help investors- both retail and institutional.

Currently, the government enters the bond market whenever its short-term borrowings from the central bank exceeds a specified per cent ceiling for more than 10 days. The government can also step in when liquidity conditions in the money market are favourable.

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