Inflow of foreign funds into equities coupled with record NRI funds and dollar purchases by RBI have boosted the forex kitty to over $300-billion-mark, highest since December 2011, in the just-concluded financial year.
For the week to March 28, the reserves rose by whopping $5.038 billion to $303.673 billion, the second highest in the 2013-14 fiscal. Foreign currency assets also jumped by $5.011 billion to $276.406 billion.
A state-run bank's treasury head attributed the rise in the forex kitty to the massive jump in FII funds flows into the equities market, which has risen to life-time highs in March on expectations of a new, dynamic government next month following the 9-phase general elections, starting tomorrow.
The current government has been hit by allegations of various scams, with industry often accusing it of sliding into policy paralysis mode and not pushing economic reforms.
Singapore brokerage DBS in a report said: "Absorption of inflows that followed RBI's concessional swap arrangement for banks and non-resident deposits coupled with strong FII interests in equities and debt have added to the reserves." From October, RBI became net purchaser of dollars on monthly basis. It net bought $10.08 billion in November, as per RBI data.
Strong interest from FIIs into equity market also led to the addition of forex reserves. Towards the year end, FIIs interest increased leading equity markets to lifetime highs.
During the April-March period, FIIs have pumped in net amount of Rs 79,709 crore in the equity market. This was the fifth consecutive fiscal year inflows by overseas investors after pulling out a net amount of Rs 47,706 crore from the share market in 2008-09.
The government selling a part of its stake in Axis Bank for over a $1 billion also helped boost the inflows as FIIs lapped up the stock.
In the week ended December 23, 2011, the reserves had stood at $300.86 billion. It remained over $300 billion for major part of 2011 and the highest ever was in the week ended September 2, 2011 when it stood at $320.78 billion.
Forex reserves began the year with a rise of near $2 billion at $293.843 billion in the week ended April 5.
The rupee, which also began the year on a healthy note, started to lose after former US Fed chairman Ben Bernanke hinted in May at tapering of its monthly purchases of assets, or withdrawal of its third round of easy money policy.
This prompted investors across the globe to offload their holdings in emerging markets economies and India also saw flight of capital.
Between May 23 and August 28, the rupee declined 22%. On August 28, the currency touched an intra-day low of 68.85, a 34 per cent plunge from beginning of the fiscal.
In the period when the rupee was in a depreciating mode, the Reserve Bank had adopted many methods including selling of dollars in order to save the currency.
The RBI also raised marginal standing facility rates, restricted daily liquidity support, among others tools to squeeze liquidity from the system and stem the rupee fall.
Between May and September 2013, the RBI remained net seller of the greenback on monthly basis. In July 2013, it sold $5.9 billion on net basis, according to the RBI data.
The forex reserves started depleting as a result of selling of the US currency by the central bank. The reserves dipped to $274.807 in the week ended September 6, the lowest in the fiscal.
The rupee reversed trend and started recovering after Governor Raghuram Rajan assumed charge at RBI on September 4.
Rajan announced a host of measures such as enhancing the limit to re-book cancelled forward exchange contracts, opening up of a special concessional window to swap fresh foreign currency non-resident (bank), or FCNR-B deposits and foreign currency borrowings which brought in $34.3 billion during the 3 months, out of which net accretion to the forex reserves was $25 billion.
Before Rajan, former RBI Governor D Subbarao opened a special forex swap window to meet oil companies daily dollar requirements on August 28.
All the measures helped in containing volatility in the forex market and also brought some stability in the rupee.
With less volatility in the foreign exchange market, RBI also reduced its dollar sales and started buying dollars to recoup its reserves.