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Reserves top US$400b in boost to India safety buffer

[MUMBAI] India's foreign-exchange reserves rose past US$400 billion for the first time ever, strengthening policy makers' buffers ahead of an expected reduction in US stimulus.

The stockpile stood at US$400.7 billion Sept 8 the Reserve Bank of India said in a release on Friday. With the Federal Reserve set to shrink its balance sheet - details of which could be announced next week - the holdings may help the rupee withstand any volatility even if global funds turn away from India's slowing economy.

"We expect portfolio inflows to slow in the coming months," said Radhika Rao, an economist at DBS Bank Ltd in Singapore. She predicts India's current account deficit will double to 1.4 percent of gross domestic product in the year through March 2018.

That's still far lower than the unprecedented 4.8 per cent of GDP touched in 2013, when the Fed had first signaled intent to curb its massive bond-buying program. Those "taper tantrums" triggered a sharp slide in the rupee and reserves depleted to around US$275 billion as the central bank struggled to buoy the currency.

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India's holdings are about US$376 billion now if stripped of gold, enough to pay for about a year of imports. The pace of reserve accretion has been one of the strongest within Asia in the past 12 months, according to analysts at Morgan Stanley, creating a challenge for the central bank, which has been intervening and mopping up the inflows.

The RBI last month cut interest rates to the lowest in seven years to boost flagging growth. At the same time, it has been absorbing surplus funds in the banking system to keep price pressures under control. Inflation has been rising sharply from record lows, and the central bank wants it to stay near the 4 per cent mid-point of its target range.

The rise in foreign exchange reserves comes as yield-hungry global investors take advantage of high real rates of interest and a rupee that has gained more than 6 per cent this year against the dollar. That may change in the months ahead as accelerating inflation in India erodes returns.

Read about the 'impossible trinity' Indian policy makers face Foreign holdings of rupee debt have risen by justĀ US$326 million so far in September and August's 126-billion rupee inflow was the smallest in six months, as investors have used up almost all of their eligible quotas to buy Indian bonds. In the freer equity market, overseas investors have withdrawn US$810 million this month, extending last month's US$1.7 billion outflow.