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Forex Reserve At 2 Year Low To $564 bn

The country’s foreign exchange reserves fell by $6.69 billion to $564 billion for the week ended August 19, latest data released by the Reserve Bank of India (RBI) showed. The reserves are at its lowest level since October 2020. In the last two weeks, the foreign exchange reserves fell by almost 9 billion. According to data released by the RBI on Friday, the fall was mainly due to a decline in foreign currency assets, by $5.8 billion, followed by gold reserves by $704 million.

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Recent Development:

Foreign exchange reserves hit an all-time high for the week ended September 3, 2021 when it hit $642 billion – which was equivalent to covering more than 14 months of imports projected for 2021-22. In almost one year, reserves are down by $78 billion. The current level of reserves can cover about 9 months of imports projected for 2022-23.

Reasons Behind It:

  • The central bank has been selling dollars in the foreign exchange market aggressively to curb any sharp fall in the rupee, which is one of the main reasons for the reserves to fall. The rupee has fallen almost 7 per cent against the dollar in 2022. Due to rising crude imports, which the country relies on for over 80 per cent of its oil needs, India’s trade imbalance increased to an all-time high of $31 billion last month, raising concerns about the country’s ability to maintain its current account. “The bid for dollars remains strong from the oil marketing companies, while exporters too are jumping 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”, with the Reserve Bank of India possibly seeking to defend the 80 levels on the one hand and strong dollar demand from importers on the other, Mr Biswas added. To blunt a geo-political event’s impact on the wider economy, the RBI has intervened and has openly said it would do whatever it takes to defend the rupee from wild volatility. While the rupee briefly hit its all-time weak level of 80 against the dollar, the RBI has helped keep the Indian currency below that level by selling dollars in the spot and futures markets.

Future Correction:

India’s forex reserves are the fourth largest globally, according to RBI governor Shaktikanta Das after the latest rate-setting meeting when the central bank hiked rates for the third consecutive time. A report showed that India has built up buffers against cyclical difficulties and has ample foreign exchange reserves to withstand pressure on credit worthiness, S&P Global Ratings said. 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 not so expensive. The RBI has a stated policy of intervening in the forex markets if it sees volatilities, but the central bank never lets out a targeted level. In the current episode, it has successfully defended the rupee depreciating above the 80-per-dollar-mark. 

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