Foreign exchange reserves fell by more than $2 billion, falling for the second week in a row
India’s foreign exchange reserves fell by more than $2 billion in the week ending August 12, when the Reserve Bank of India intervened to boost the rupee and keep the currency below $80.
It is an effort that India’s central bank deems essential and it will do whatever is necessary to maintain the stability of the rupee, limiting any sharp fluctuations despite the currency markets. extremely volatile.
The RBI’s weekly statistics supplement data showed 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 in the previous week.
The drop in the latest week was the largest in a month, and the country’s imports fell for a second week.
Since Russia invaded Ukraine, India’s foreign exchange reserves have fallen for 19 weeks out of 25 since then, reaching nearly $61 billion during that time.
However, India’s foreign exchange reserves remain the fourth largest globally, RBI governor Shaktikanta Das said after the latest rate-setting meeting as the central bank raised interest rates for the third time in a row.
The rupee has fallen to just under 80 per dollar from about 74 in which it traded before the Ukraine crisis, in line with a broader trend of capital inflows into dollar-denominated assets.
The world’s reserve currency, the dollar, has taken over the world, gaining significantly against most major currencies.
While the rupee quickly hit an all-time low of 80 against the dollar, the RBI helped keep the Indian currency below that level by selling dollars in the spot and futures markets.
But the decline in foreign exchange reserves during periods of money market volatility has decreased over time due to RBI interventions, a paper by central bankers said.
Volatility expectations were also reduced over the study’s time period, which began in 2007 and includes the current period of upheaval caused by the Russo-Ukrainian war.
The RBI has a stated policy of intervening in the forex market if it sees volatility, but the central bank never sets a target level. In the current episode, it successfully defended the falling rupee above the 80 per dollar mark.
Research by Saurabh Nath, Vikram Rajput and Gopalakrishnan S from the RBI’s financial markets operations division, which does not represent the central bank’s view, said reserves were depleted 22% during the financial crisis. global 2008-09 compared to just 6%. cents in the current episode after the Russian invasion of Ukraine.
On an absolute basis, the global financial crisis of 2008-09 resulted in a reduction of $70 billion in reserves, which fell to $17 billion during the COVID-19 period and to $56 billion by July 29 this year by Ukraine. invasion-related effects.
What has perhaps limited the damage to the rupee and covered the country’s imports has been the return of foreign investors to India’s capital markets since last month.
Indeed, after a few months of net selling of Indian assets, foreign investors turned to be net buyers of domestic stocks and bonds in July, with that trend continuing this month.
The drop in international crude oil prices below $100 per barrel has also boosted investor sentiment. Oil prices fell 1.5% for the week on the back of a stronger US dollar and concerns that an economic slowdown would weaken demand for crude.
The strength of the US dollar hit a 5-week high, which also limited crude oil price gains as it made oil more expensive for buyers in other currencies.
Falling crude oil prices are good news for India, which imports more than 80% of its oil needs and has a widening trade deficit.
