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Forex Reserves Slump To Over 2-Year Low As RBI Defends Rupee To Below 80

Foreign exchange reserves fall to $564.053 billion

India’s forex reserves plunged to their lowest point in more than two years, marking the third consecutive week of decline as the Reserve Bank of India, true to its word, intervened to prevent the rupee from weakening to more than 80 per dollar during a week in which the dollar rose to more than two decades high.

The RBI’s weekly statistics showed that the country’s foreign exchange reserves fell $6.687 billion to $564.053 billion in the week ending Aug. 19, the lowest point in more than two years and the third week of decline. The magnitude of the drop last week, $6.687 billion, was the largest since mid-July.

In the week before, in the week ending August 12, the country’s import coverage had fallen $2,238 to $570.74 billion. Apart from the rise in the last week of July, which seems like a statistical outlier, India’s forex war chest has been falling every week since the beginning of July. It has fallen 20 weeks out of 26 since Russia invaded Ukraine in late February.

That drop in forex reserves of just over $67 billion since the Ukraine crisis and nearly $80 billion from the all-time high last year reflects the rupee’s decline from about 74 per dollar to nearly 80, a level analysts say the RBI fiercely defended.

The fate of the Indian currency has been determined by the rampant dollar in international markets, driven by an exodus of capital in dollar-denominated assets and at the expense of almost every other major currency in the world.

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On Friday, the Indian rupee eased against the greenback for the third week in a row as pressures from firmer oil prices and the dollar shed some of the optimism of a report about adding the Asian nation to a coveted bond market. emerging markets index.

The Financial Times reported that JPMorgan is seeking investor opinion to qualify a large portion of the Indian government bond market for inclusion in the widely monitored GBI-EM Global Diversified index of a local currency debt.

However, Kunal Sodhani, vice president of the global trade center at Shinhan Bank, told Reuters that this influx was insufficient to help the rupee.

“I don’t think the report has anything to do with today’s session. The rupee is weakening as the dollar index moves closer to 109 and… there is hardly any inflow,” said Mr. Sodhani.

“Oil has bounced back to $102, and that pressure is there because India’s underlying reality hasn’t changed. The number of trade deficits is still a big concern.”

As a result of rising crude oil imports, on which the country depends for more than 80 percent of its oil needs, India’s trade imbalance rose to an all-time high of $31 billion last month, raising concerns about the economy. the country’s ability to maintain its current account.

“The dollar bid remains strong from the oil marketing firms, as exporters jump 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 potentially trying to defend the 80 levels on the one hand and strong dollar demand from importers on the other, Mr Biswas added .

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To mitigate the impact of a geopolitical event on the broader economy, the RBI stepped in and said openly it would do whatever it takes to protect the rupee from wild volatility.

While the rupee briefly hit its all-time low of 80 against the dollar, the RBI has helped keep the Indian currency below that level by selling dollars on the spot and futures markets.

As a result, the central bank has lowered the country’s import coverage.

Still, 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 raised rates for the third consecutive time.

A report showed that India has built buffers against cyclical difficulties and has sufficient foreign exchange reserves to withstand credit pressures, S&P Global Ratings said Thursday.

During the India Credit Spotlight 2022 webinar, Andrew Wood, director of S&P Sovereign & International Public Finance Ratings, said the country has a strong external balance sheet and limited external debt, which makes paying off debt less expensive.

“The country has built up buffers against cyclical problems like the one we’re dealing with right now,” Wood said.

He added that the rating agency does not expect the short-term pressure to seriously affect India’s creditworthiness.

The RBI has an outspoken policy of intervening in the forex markets when it sees volatilities, but the central bank never gives a targeted level. In the current installment, it successfully defended the rupee’s depreciation above the 80-per-dollar mark.

A separate Reuters report citing government and industry sources showed India could encourage exporters to make deals in rupees to boost the currency’s attractiveness and increase commodity sales to Russia, which have declined. as a result of western sanctions.

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After the RBI established a framework for international trade arrangements using the rupee last month, the measure aims to increase Russian trade. Indian companies are already exchanging dollars and euros for Asian currencies to settle transactions to evade sanctions the West has imposed on Russia over its invasion of Ukraine.

According to those Reuters sources, bankers and dealers have not yet increased their use of the rupee for settlements as they are still awaiting further information about the government’s and central bank’s incentives to use the rupee.

A separate study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S of the RBI’s financial markets division, which does not reflect the view of the central bank, said reserves were depleted by 22 percent in the 2008-09 global financial crisis. compared to just 6 percent in the current episode after the Russian invasion of Ukraine.

On an absolute basis, the global financial crisis of 2008-09 led to a $70 billion drawdown in reserves, which fell to $17 billion during the COVID-19 period and reached $56 billion on July 29 of this year as a result of the Ukraine invasion-related impact.

But for now, the current crisis is far from over and could mean further erosion in the country’s forex war chest.

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