INDIA: India’s foreign exchange reserves have plummeted by more than $80 billion since the Ukraine crisis, falling by more than $2 billion in the past week as the Reserve Bank of India sold dollars to support the rupee from breaking the 80-per-dollar level.
The RBI’s latest weekly statistics showed foreign reserves fell by $2.234 billion to $550.871 billion in the week ended September 9 from $553.105 billion in the previous week, the lowest level in nearly two years.
India’s import cover has fallen for six straight weeks and 23 of 29 weeks since Russia’s invasion of Ukraine in late February, reflecting the RBI’s continued draw on reserves to combat a surge in the US currency due to capital outflows into dollar-denominated assets.
Compared to the peak of the country’s foreign exchange reserves in October last year, the foreign exchange war chest is down by more than $90 billion.
Despite the steady inflow of foreign capital into the country’s markets, the growing current account deficit has not helped to stem the decline in import coverage.
The rupee has fallen dramatically this year from around 74 to the dollar to a weak record level of over 80 to the dollar, with the RBI stepping in to manage the currency from extreme wild swings.
This was partially confirmed by the RBI’s latest monthly bulletin released on Friday, which showed the central bank sold a net $19.05 billion in the spot foreign exchange market in July. Market movements in the rupee indicate that the trend continued in August and this month.
The decline in the country’s foreign exchange reserves is likely to be a topic for a while, with the dollar still gaining ground and hitting new highs not seen against most major currencies in more than two decades.
The rupee showed its worst week in five on Friday as the dollar soared to a new record high on bigger bets on a Federal Reserve rate hike and as the World Bank and International Monetary Fund (IMF) warned of a slowdown in economic growth with rising inflation.
A foreign exchange trader told Reuters that market participants were cautious that the rupee was not allowed to weaken above 80 to the dollar and saw that as a level to protect.
Indian shares plunged into a market bloodbath on Friday, with stock benchmarks erasing weekly gains and extending their losses for a third straight session as they watched a global sell-off from looming recession risks from the broadest and most aggressive policy tightening in a decade.
This suggests more RBI drawing on reserves to protect the rupee from wild swings.
We expect the rupee to trade on a negative bias against a strong dollar and risk aversion in global markets. Global markets fell after IMF spokesperson Gerry Rice raised concerns about a further slowdown in the global economy and said some countries are expected to slip into recession in 2023,” Anuj Choudhary, research analyst at Sharekhan at BNP Paribas told PTI.
While the decline in foreign exchange reserves has been significant this year, the country has still fared better than emerging markets where import coverage has fallen to crisis levels.
A breakdown of the latest RBI data showed that India’s foreign currency assets (FCAs), the largest component of foreign reserves, fell by $2.519 billion to $489.598 billion in the week ended September 9, compared with a decline of $6.527 billion to $492.117. billion in the week before the reporting period.
The value of appreciation or depreciation of non-US currencies, such as the euro, pound and yen, held in foreign exchange reserves is included in foreign currency assets, denominated in dollars.
However, the value of gold reserves climbed by $340 million to $38.644 billion.
While the Special Drawing Rights (SDRs) decreased by USD 63 million to USD 17.719 billion, the country’s reserve position with the International Monetary Fund rose by USD 8 million to USD 4.91 billion during the week under review.
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