Border row seen denting forex reserves

The country’s foreign exchange reserves hit a record high in the week to May 21 driven by strong capital inflows, but reserves are seen declining as the central bank used part of it to shelter the rupee from the Kashmir conflict. The Reserve Bank of India (RBI) said on Saturday its foreign exchange reserves rose to $33.443 billion on May 21 from $33.250 billion in the previous week. The Indian currency and stock markets came under pressure this week as the two nuclear-capable neighbours, India and Pakistan, were locked in their worst confrontation in nearly three decades. Currency dealers said they did not expect fresh accretion to India’s foreign reserves as overseas funds are seen staying from the markets till the flare-up in Kashmir cooled off. The latest face-off between India and Pakistan comes after hundreds of what New Delhi says are Pakistani-backed infiltrators crossed into the Indian side of Kashmir and it ordered air strikes to evict them on Wednesday. The RBI’s reserves have gone up mainly on account of its absorbtion of dollar inflows through a clutch of state-run banks. "The accretion to reserves will definitely slow down as foreign fund flows slow down, unless something positive comes out of the border situation," Janak Desai, treasurer at Standard Chartered Bank told Reuters. Desai said the RBI may have used up a part of its reserves to control the swings seen in the rupee this week. Dealers said the central bank sold dollars on Friday through its surrogate the State Bank of India (SBI) after the rupee fell on worries that the border conflict could escalate. The dollar sales by SBI helped restore stability in the markets and helped the rupee recover to end firmer at 42.91/93 per dollar from an all-time closing low of 43.03/05 on Thursday. The rupee has lost 0.38% since its close on Tuesday "If the market is to be patrolled by the central bank, the reserves will have to be used," said a European bank treasurer. "That is sure to bring down reserves as fresh investment flows are unlikely till the situation in Kashmir cools down," he said. Data released on Friday by capital market regulator Securities and Exchange Board of India showed foreign investment in Indian equities slowing to $36.5 million in the week to May 28 as against $311 million the first two weeks this month.