Foreign exchange reserves fall by $2tn as RBI sells dollars to defend rupiah

Foreign exchange reserves fall by $2tn as RBI sells dollars to defend rupiah

Foreign exchange reserves fall by more than $2 billion, plunging for the second week in a row

India’s foreign exchange reserves fell by more than $2 billion in the week ending August 12 as the Reserve Bank of India intervened to shore up the rupee and keep the currency below 80 to the dollar. .

It’s an effort India’s central bank has called essential, and it would do whatever it takes to keep the rupee stable, limiting wild swings despite extremely volatile currency markets.

Data from the RBI’s weekly statistical supplement showed the country’s foreign exchange reserves fell to $570.74 billion in the week ending August 12, down $2.238 billion from $572.978 billion. dollars the previous week.

The magnitude of this fall in the past week was the largest in a month, and the country’s import coverage fell in the second week.

Since Russia invaded Ukraine, India’s foreign exchange reserves have fallen for 19 weeks out of a total of 25 since then, falling to nearly $61 billion in that period.

Yet India’s foreign exchange reserves are the fourth largest in the world, RBI Governor Shaktikanta Das said after the last rate-setting meeting when the central bank raised rates for the third consecutive time.

The rupiah has fallen to just under 80 to the dollar, from around 74 before the Ukraine crisis, alongside a wider outflow of capital into dollar-denominated assets.

The global reserve currency, the dollar, reigned supreme across the board, gaining significantly against nearly every major currency.

While the rupee briefly hit its 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 drawdown of foreign reserves during periods of foreign exchange market volatility has declined over time due to RBI interventions, according to a paper by central bank leaders.

Volatility expectations have also declined over the study period, which starts from 2007 and includes the current episode of volatility triggered by the Russian-Ukrainian war.

The RBI has a stated policy to intervene in the foreign exchange markets if it sees volatilities, but the central bank never lets a targeted level slip away. In the current episode, he successfully defended the Rupee’s depreciation above the 80 per dollar mark.

The study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S of the RBI’s Financial Markets Operations Department, which does not represent the view of the central bank, indicates that reserves fell by 22% during the financial crisis of 2008-2009, against only 6% in the current episode following the Russian invasion of Ukraine.

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

What likely limited the damage to the rupee and the country’s import hedge was the return of foreign investors to Indian capital markets since last month.

Indeed, after being net sellers of Indian assets for several months, foreign investors became net buyers of domestic stocks and bonds in July, with this trend continuing this month.

The fall in international crude oil prices below $100 a barrel also boosted investor confidence. Oil prices fell 1.5% for the week on a stronger US dollar and fears that an economic slowdown would weaken demand for crude.

US dollar strength hit a five-week high, which also capped crude’s gains as it makes oil more expensive for buyers in other currencies.

This fall in crude prices is good news for India, which imports more than 80% of its oil needs and whose trade deficit is widening.

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