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India seen cutting its dollar
reserves Fears of a weakening appetite for dollars among Asian central banks were re-ignited on Tuesday when India became the latest nation to talk of reserve diversification.
India is secretive about the composition of its reserves, which have ballooned by $13.5bn since January to a record $142.6bn, the sixth largest in the world. But S.S. Palanimanickam, the junior finance minister, said in a written reply to a question about New Delhi’s exposure to the dollar: “Appropriate adjustments are made in the currency composition of foreign exchange reserves from time to time depending on various considerations . . . like benefits from diversification of currency risk.” The euro is an important currency for the Reserve Bank of India, he added in comments that will intensify speculation that New Delhi may be looking to reduce its exposure to the dollar. India caused some jitters for the dollar earlier in the year when it approved plans to use its forex reserves as collateral to fund infrastructure investment, even though such spending has been limited to $2.3bn in the next 12 months. Behind this veil of secrecy, India is believed to have started to switch into the euro and, to a lesser extent, sterling and yen. “I believe they are gradually shifting away from the dollar,” said Hans Redeker, global head of forex strategy at BNP Paribas. Mr Redeker sees India as one of many Asian nations looking to earn a higher risk-adjusted return from reserves but says the RBI will be wary of seeking higher yields in the US corporate and junk bond markets. The Bank for International Settlements said in March that India’s banking sector, including commercial banks as well as the RBI, held just 43 per cent of its deposits in dollars as of September 2004, compared to 68 per cent in September 2001. As for the central bank, analysis by ABN Amro comparing movements in total reserves with fluctuations in the euro-dollar rate suggests that about two-thirds of its reserves are still held in dollars. Asian reserve diversification could be disastrous for the dollar – with the US needing to attract $2bn a day to fund its current account deficit – if central banks were to stop buying Treasuries and actively sell dollars instead. Mr Redeker predicts this, with the dollar’s share of global reserves likely to fall back from 64 per cent at present to the 53 per cent level of the early 1990s. |
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