Foreign exchange reserves decline to $564.053 billion
India’s foreign exchange reserves plunged to their lowest level in over two years, marking the third straight week of decline as the Reserve Bank of India, true to its word, intervened to prevent the rupee from falling during a week when the dollar rose weakened above 80 per dollar, weakened above two-decade highs.
RBI weekly statistical data showed that the country’s foreign exchange reserves fell by $6.687 billion to $564.053 billion in the week ended August 19, marking the lowest level in over two years and the third straight week of the decline . Last week’s dip was $6.687 billion, the largest since mid-July.
The week before, in the week ended August 12, the country’s import coverage had fallen by $2.238 to $570.74 billion. Aside from the surge in the last week of July, which seems like a statistical outlier, India’s forex war chest has fallen every week since early July. He has fallen in 20 of the 26 weeks since Russia invaded Ukraine in late February.
That plunge in foreign exchange reserves of just over $67 billion since the Ukraine crisis and nearly $80 billion from its all-time high last year reflects the rupee’s fall from about 74 per dollar to nearly 80, a level that analysts said the RBI has vehemently defended.
The fate of the Indian currency was fueled by the unbridled dollar in international markets, fueled by a flight of capital into dollar-denominated assets at the expense of almost every other major world currency.
On Friday, the Indian rupee fell against the greenback for a third straight week, as pressure from firmer oil prices and the dollar dampened some optimism from a report on the Asian nation’s inclusion in a coveted emerging market bond index.
The Financial Times reported that JPMorgan is soliciting investor views on whether a large chunk of India’s government bond market should be eligible for inclusion in its widely used GBI-EM Global Diversified index of local currency debt.
However, Kunal Sodhani, vice president of Shinhan Bank’s global trade hub, told Reuters those inflows were not enough to help the rupee.
“I don’t think the report has anything to do with today’s meeting. The rupee is weakening as the dollar index approaches 109 and…there are few inflows,” Mr Sodhani said.
“Oil prices are back up to $102 and this pressure is there because the underlying reality of India has not changed.
India’s trade imbalance soared to an all-time high of $31 billion last month due to rising crude oil imports, which the country relies on for over 80 percent of its oil needs, raising concerns about the country’s ability to sustain its current account balance.
“Oil marketers’ bid for the dollar remains strong while exporters are also stepping in to lock in (higher forward) rates,” Arnob Biswas, head of research at SMC Global Securities, told Reuters.
The technical picture for the rupee “looks tired” as the Reserve Bank of India may look to defend the 80 level on the one hand and strong dollar demand from importers on the other, Mr Biswas added.
In a bid to mitigate the impact of a geopolitical event on the broader economy, the RBI has intervened and has frankly said it would do whatever it takes to protect the rupee from wild volatility.
While the rupee briefly touched its all-time weak level of 80 against the dollar, the RBI has helped keep the Indian currency below those levels by selling dollars in the spot and futures markets.
The central bank has thus pulled the country’s import cover.
Still, India’s foreign exchange reserves are the fourth-largest in the world, according to RBI Governor Shaktikanta Das after the latest rate-setting meeting, when the central bank hiked rates for a third straight month.
A report showed India has built up buffers against cyclical difficulties and has sufficient foreign exchange reserves to withstand credit pressures, S&P Global Ratings said on Thursday.
Speaking at the India Credit Spotlight 2022 webinar, S&P Sovereign & International Public Finance Ratings Director Andrew Wood said the country has a strong external balance sheet and limited external debt, making debt servicing less expensive.
“The country has built up buffers against cyclical difficulties like the ones we are experiencing,” Mr Wood said.
He added that the rating agency does not expect the near-term pressures to seriously affect India’s creditworthiness.
The RBI has a stated policy of intervening in FX markets when it sees volatility, but the central bank never announces a target level. In the current episode, she has successfully defended the devaluation of the rupee above the 80-per-dollar mark.
A separate Reuters report, citing government and industry sources, showed that India could offer incentives to exporters doing business in rupees to boost the currency’s appeal and boost sales of goods to Russia, which have fallen due to Western sanctions .
After the RBI created a framework for international trade settlements using the rupee last month, the move is expected to boost Russian trade. Indian companies are already swapping dollars and euros for Asian currencies to settle transactions in a bid to evade sanctions imposed on Russia by the West over its invasion of Ukraine.
According to these Reuters sources, bankers and traders have yet to increase their use of the rupee for settlements as they are still awaiting more information on government and central bank incentives to use the rupee.
A separate study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S of RBI’s financial markets department, which does not reflect the central bank’s views, says reserves were depleted by 22 percent during the 2008-09 global financial crisis, compared to just 6 percent in the current episode after the Russian invasion of Ukraine.
On an absolute basis, the 2008-09 global financial crisis resulted in a loss of US$70 billion in reserves, which declined to US$17 billion during the COVID-19 period, accruing on July 29 this year due to Ukraine $56 billion Invasion-related impact.
But for now, the current crisis is far from over and could spell further erosion of the country’s FX war chest.
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