India’s foreign exchange reserves fell below $550 billion for the first time in nearly two years, marking the seventh consecutive week of declines during which the country’s import coverage fell by nearly $30 billion, data from the Reserve Bank of India shows. on Friday.
The RBI’s weekly supplemental data showed that the country’s forex reserves fell $5.219 billion to $545.652 billion in the week ending Sept. 16, compared to $550.871 billion in the previous week.
Analysts believe that the RBI’s intervention currency markets to prevent the rupee from weakening sharply against the dollar are the main driver of the decline in reserves, which is also partly due to exchange rate adjustments.
Forex reserves have fallen for seven weeks in a row, representing a total erosion of $28.223 billion over the period, as the RBI sold dollars to protect the rupee against a sharp decline and from breaking the record level of just over 80 per dollar. .
But the factor that has brought down India’s rupee and import coverage is the currency on the other side of the exchange rate, the dollar.
Since Russia invaded Ukraine, investors have flocked to dollar-denominated assets on flights to safety. The biggest impact of the crisis in Ukraine has been the rise in commodity prices and, in turn, a rise in global inflation to several decades high.
That has spurred nearly every central bank into a tightening not seen in recent years, with the US Federal Reserve leading the pack even at the cost of a recession, pushing the dollar to its highest level against most for decades. major currencies.
The rupee has fallen dramatically this year, from about 74 before the crisis in Ukraine to multiple record lows of more than 80 per dollar, a level never seen before.
An unprecedented drop in currencies listed on the opposite side of the dollar pushed the RBI its forex reserves faster than the Fed’s taper tantrum in 2013.
The country’s import coverage has fallen by nearly $86 billion since Russia’s incursions into Ukraine, which Moscow calls a special operation, and by about $97 billion from its peak in October last year.
To put that loss volume into context, it took India nearly a year to add about $60 billion to its forex war coffers to peak, which was its best rate of growth in recent years.
The central bank has had to spend that amount and some in about six months to not stop the weakening of the rupee completely, but only to limit and stabilize the declining rupee against an unfettered dollar.
If this week’s trading pattern is anything to go by, then it’s clear that the declining trend in forex reserves is likely to continue as the rupee crashed to new lows this week, first through the tenacious level of 80 per dollar and then then to well past 81 on Friday.
The sharp plunge in the rupee on Thursday and Friday was exactly what the RBI defended the domestic currency against by burning its reserves. The latest moves suggest that the central bank may be willing to allow the rupee to depreciate.
A further breakdown of the RBI data showed that the decline in reserves in the week ending Sept. 16 was driven by a decline in foreign currency assets (FCA), a significant portion of total reserves.
The FCAs, which are denominated in dollars, take into account the impact of appreciation or depreciation of non-US currencies held in foreign exchange reserves, such as the euro, the pound and the yen. During the reporting week, the FCA fell $4.698 billion to $484.901 billion.
The data showed that the value of gold reserves fell by $458 million to $38.186 billion.
According to the RBI, special drawing rights (SDRs) fell $32 million to $17.686 billion and the country’s reserve position with the IMF fell $31 million to $4.88 billion in the reporting week.