Foreign exchange reserves fall by over $2 billion, falling for the second straight week
India’s foreign exchange reserves collapsed by over $2 billion in the week ended August 12 as the Reserve Bank of India intervened to support the rupee and keep the currency below 80 per dollar.
This is an effort that the Central Bank of India has called essential and would do whatever it takes to maintain rupee stability and limit wild swings despite extremely volatile forex markets.
The RBI’s weekly statistical supplement showed that the country’s foreign exchange reserves fell to $570.74 billion in the week ended August 12, down $2.238 billion from $572.978 billion the previous week.
The magnitude of that drop last week was the largest in a month, and the country’s import coverage fell for the second week.
Since Russia invaded Ukraine, India’s foreign exchange reserves have fallen for 19 of the 25 weeks since, reaching nearly $61 billion in that period.
Still, India’s foreign exchange reserves are the fourth-largest in the world, RBI Governor Shakkanta Das said after the latest rate-setting meeting, which saw the central bank hike interest rates for the third consecutive month.
The rupee has fallen to just under 80 from around 74 per dollar when it was trading before the Ukraine crisis, in line with broader capital flight into dollar-denominated assets.
The world’s reserve currency, the dollar, has gained the upper hand across the board, appreciating significantly against almost every major currency.
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.
But FX reserve drawdowns during periods of FX market volatility have slowed over time due to RBI interventions, according to a paper from central bank executives.
Expectations for volatility have also decreased during the period under review, which starts from 2007 and includes the current episode of volatility triggered by the Russia-Ukraine war.
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.
The 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 cents 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.
What has likely limited the damage to the rupee and the country’s import coverage is the return of foreign investors to Indian capital markets since last month.
After several months of being net sellers of Indian assets, foreign investors became net buyers of domestic equities and bonds in July, a trend that continues this month.
The fall in international crude oil prices to below $100 a barrel has also lifted investor sentiment. Oil prices fell 1.5 percent on the week on a stronger US dollar and fears an economic slowdown would weaken crude demand.
US dollar strength hit a five-week high, which also limited crude oil gains as it made oil more expensive for buyers in other currencies.
This drop in crude oil prices is good news for India, which imports more than 80 percent of its oil needs and has a growing trade deficit.
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