India leads Asia’s charge to restock forex reserves

India is leading among Asia’s emerging market (EM) central banks in rebuilding foreign exchange reserves, which they hope would help them defend their currencies if the US dollar rebounds.

Taiwan, India, South Korea and Southeast Asian countries have recouped about US$132 billion since November last year — more than half of what they lost last year — by soaking up US dollar inflows, with a weaker greenback also boosting their portfolio valuations, Bloomberg calculations based on foreign exchange data showed.

The rupee has lagged behind emerging market peers partly because the Indian central bank has been the most aggressive in rebuilding reserves.

These countries saw their foreign exchange reserves drop by US$243 billion in the first 10 months of last year as they sought to defend currencies that plunged against the US dollar. Rebuilding their reserves might help Asia’s emerging markets withstand any potential rebound in the greenback, as some traders start pricing in higher US peak rates, which would hit demand for risk assets.

“If an investor asset reallocation back into EM/Asia continues to materialize, owing to the significant foreign portfolio outflows and underweight positioning throughout most of last year, we believe Asia ex-Japan central banks will broadly accumulate reserves in the coming months,” Nomura Holdings Inc strategists including Craig Chan (陳立偉) wrote in a note on Thursday last week.

Goldman Sachs Group Inc has an underperformer rating on the rupee, partly due to the Reserve Bank of India’s actions, while Nomura is advising clients to short the rupee against the Indonesian rupiah.

Deutsche Bank AG has tactically shifted to a “hold” or “reduce” bias on a majority of their long Asia currency recommendations, from an earlier “add” bias, but remains positive on Asian currencies from a medium-term perspective.

Since losing US$100 billion largely by propping up the rupee last year, the Reserve Bank of India has taken every opportunity to mop up US dollars, boosting reserves by almost US$50 billion in the past three months.

South Korea has added US$26 billion in the same period after earlier losing US$49 billion, and Indonesia has recouped US$9 billion of the US$15 billion it lost, Bloomberg calculations showed.

Not all central banks have been equally aggressive.

Bank Indonesia chose to sit on the sidelines last month, despite seeing sizeable portfolio inflows. Contrast that with India, which bought an estimated net US$10.1 billion in the spot foreign exchange market, while South Korea bought US$4.2 billion in the same month, Nomura calculations showed.

Thailand bought US$5.3 billion across its spot and forward markets, it estimated.

Most emerging Asian currencies have surged in the past three months, led by the Thai baht and Philippine peso, with the former gaining almost 5 percent as the US dollar weakened on bets that the US Federal Reserve would pivot on interest rates.

Recent data have cast doubts on those expectations. Fed officials stressed the need for further interest rate increases to help tame inflation after US data again beat economists’ estimates on Tuesday.

Overseas investors bought US$8.6 billion of assets in emerging markets in Asia excluding China last month, estimates by Australia & New Zealand Banking Group Ltd (ANZ) showed.

The bank expects inflows into the region to continue, although risks to that view include inflation not receding in the US as expected and potential delays in negotiations over the US debt ceiling, ANZ Asia research head Khoon Goh (吳昆) wrote in a note.

“We think that the threshold of foreign exchange gains for intervention have already been met,” Deutsche Bank Asia macro strategy head Mallika Sachdeva said. “It would be fair to expect Asian central banks to start intervening. We find episodes of Asian central bank intervention tended to significantly slow foreign exchange moves, but did not succeed in engineering reversals.”