Forex Reserves Fall For Seventh Straight Week To Below $550 Billion For First Time In Nearly 2 Years

India’s foreign exchange reserves fell below $550 billion for the first time in nearly two years, the seventh straight week of decline, during which the country’s import cover fell to about $30 billion, the Reserve Bank of India said. The data showed on Friday.

gave RBI weekly statistical supplementary data It shows that the country’s foreign exchange reserves decreased by $5.219 billion to $545.652 billion in the week ended September 16, from $550.871 billion in the previous week.

Analysts believe that the RBI’s intervention to prevent the rupee from weakening sharply against the dollar is the main reason for the decline in reserves in the currency markets, partly due to the exchange rate adjustment.

Foreign exchange reserves have declined for seven consecutive weeks, amounting to a total erosion of $28.223 billion during the period as the RBI sold dollars to protect the rupee from a sharp fall and over 80 per dollar. from breaking record lows.

But the factor that has depreciated the rupee and increased India’s import cover is the currency on the other side of the exchange rate, the dollar.

Ever since Russia invaded Ukraine, investors have flocked to dollar-denominated assets on flight-to-safety terms. A major consequence of the Ukraine crisis has been a rise in commodity prices and, as a result, global inflation reaching multi-decade highs.

That has led nearly every central bank to a level of tightening not seen in recent years, with the U.S. Federal Reserve leading the pack even at the cost of a recession, which has largely driven the dollar. It has pushed to multi-decade highs against major currencies.

The rupee has fallen dramatically this year, from around 74 before the Ukraine crisis to a record low of more than 80 to the dollar, levels never seen before.

Abnormal declines in currencies denominated on the other side of the dollar pushed the RBI to push its forex reserves faster than the Fed’s taper tantrum in 2013.

The country’s imports have fallen by about $86 billion since Russia’s incursion into Ukraine, which Moscow calls a special operation, and about $97 billion from its peak in October last year.

To put the magnitude of this loss into context, it took India nearly a year to add nearly $60 billion to its forex war chest, its best growth rate in recent years.

The central bank had to spend this amount and some more in about six months not to prevent the rupee from weakening completely, but only to limit and stabilize the falling rupee against the dollar.

If the trading pattern this week is anything to go by, it is clear that the downward trend in foreign exchange reserves is likely to continue as the rupee fell to a new all-time low this week, with an earlier stubborn level of 80 per dollar. and then over 81 on Friday.

The sharp fall in the rupee on Thursday and Friday was precisely what the RBI was defending the domestic currency against by burning reserves. The latest moves suggest that the central bank may be ready to let the rupee depreciate.

A further breakdown of the RBI data shows that the drop in reserves in the week ended September 16 was due to a decline in foreign currency assets (FCA), a significant part of total reserves.

FCAs, which are expressed in dollar terms, take into account the impact of the appreciation or depreciation of non-US currencies held in foreign exchange reserves, such as the euro, pound and yen. During the reporting week, FCA decreased by $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 by $32 million to $17.686 billion and the country’s reserve position with the IMF fell by $31 million to $4.88 billion in the reporting week.