Widening trade deficit with India hurts dollar reserve

Widening trade deficit with India is hurting the foreign currency (forex) reserve, especially dollar.

The central bank purchased Indian currency equal to 102.1 billion selling $2.2 billion in the Indian money market during last fiscal year, reveals Nepal rastra bank data.

"In 2008-09, Indian currency equal to 73.4 billion was purchased selling $1.5 billion," said the central bank attributing an accelerated trade deficits with India for the largest amount of Indian Currency (IC) purchase.

Coupled with the unnatural gold import, the whopping trade deficit with India has been hurting the dollar reserve, said a source at the central bank.

"The gross foreign exchange reserves dropped by seven per cent to Rs 266.57 billion in mid-July 2010 from a level of Rs 286.54 billion as at mid-July 2009," revealed the central bank's annual data supporting the claim.

"Such reserves had grown by 34.8 per cent in a fiscal ago. Out of total reserve, NRB's reserve declined by 8.4 per cent to Rs 205.37 billion in mid-July 2010 from a level of Rs 224.19 billion a fiscal earlier," it said, adding that the gross foreign exchange reserves in dollar terms declined by 2.5 per cent to $3.58 billion in mid-July 2010 against a growth of 18.3 per cent last year.

"The widening of the current account deficit has resulted in the depletion of foreign exchange reserves. Based on the trend of import in the twelve months of 2009-10, the current level of reserves is sufficient for financing merchandise imports of 8.6 months and merchandise and service imports of 7.3 months."

In 2008-09, the cenmtral bank has purchased Indian currency amounting 73.4 billion through the sale of $1.5 billion. However, in 2007-08, the central bank has purchansed IC amounting 70.6 billion through the sale of $1.7 billion.

Similarly, the central bank has injected net liquidity amounting to Rs 118.7 billion through net purchase of $1.6 billion from commercial banks in the last fiscal year. "However, a net liquidity of Rs 142.5 billion was injected through the net purchase of $1.8 billion in 2008-09," according to the central bank.

In 2009-10 the central bank injected net liquidity amounting to Rs 126.6 billion from the open market operations of government bonds and Rs 7.4 billion and Rs 1.0 billion were mopped up through outright sale auction and reverse repo auction respectively, while Rs 131.7 billion and Rs 3.4 billion were injected through repo and outright purchase auction respectively.

"In 2008-09, net liquidity amounting to Rs.9.7 billion was mopped up from such operations. Of the total liquidity mopped up, Rs 7.5 billion and Rs 13.3 billion were mopped up through outright sale auction and reverse repo auction respectively, while Rs 11.0 billion was injected through repo auction," according to the central bank.