Foreign exchange reserves hit 3-week high on strong rupiah and capital inflow

Foreign exchange reserves hit 3-week high on strong rupiah and capital inflow

Foreign exchange reserves increased by more than $2 billion thanks to strong capital inflows

India’s foreign exchange reserves rose to their highest level in three weeks in the last week of July, supported by strong capital inflows and the weakening of the rupee to significant gains of 80 to the dollar at less than 79.

Supplementary statistical data from the Reserve Bank of India showed that foreign exchange reserves rose by $2.315 billion to $573.875 billion in the week ending July 29 from $571.560 billion the previous week. .

This marks the highest FX reserves in three weeks and kicks off a four-week downtrend.

The Reserve Bank of India has been burning the country’s foreign exchange reserves in its attempt to shore up the rupee by selling dollars in the spot and forward market, especially since Russia invaded Ukraine and the rupee has fallen. crashed to 77 to the dollar for the first time and fell lower to cross the 80 mark against the greenback, its historically weak level.

While the rupee fell dramatically from around 74 to the dollar at the start of the year, the intervention of the RBI helped prevent the currency from weakening even more abruptly and wildly.

The RBI, for its part, declared itself ready to do anything to stabilize the rupee. Indeed, the Governor of the RBI, Shaktikanta Das, had declared: “you buy an umbrella to use it when it rains! indicating that the central bank uses foreign exchange reserves to deal with currency volatility.

The recent strength of the rupiah has supported the latest reversal in India’s import cover. The currency hit a one-month high on Tuesday, trading below 79 to the dollar on strong capital inflows in recent days and as the greenback stumbled on easing currency action bets aggressive move by the Federal Reserve amid recession fears.

Foreign institutional investors became net buyers of Indian assets for the first time in a year in July. This trend continued, providing relief to the rupee and the country’s import hedge.

Indeed, after nine consecutive months of relentless selling, overseas investors turned into net buyers and invested nearly Rs 5,000 crore in Indian stocks in July on the falling dollar index and strong corporate earnings. .

This contrasts sharply with a sharp Rs 50,145 crore drawdown from the stock market seen in June. The reversal in July was the highest net outflow since March 2020, when foreign portfolio investors (REITs) withdrew Rs 61,973 crore from stocks, according to custodian data.

REITs became net buyers for the first time in July after nine consecutive months of massive net outflows, which began in October last year.

Between October 2021 and June 2022, they sold a whopping Rs 2.46 lakh crore in Indian stock markets.

Recent international investor sentiment in favor of Indian assets could be the reversal of a sell-off in Indian stocks, and many pundits are pointing to this pattern as a turning point for the markets.

“This gives us a positive signal that things may not be so bad for foreign investment in the stock markets,” Madan Sabnavis, chief economist at Bank of Baroda, told NDTV.

“If this trend continues, it could be a turning point for equity markets; it would also help the rupiah as foreign capital outflows pull the rupiah down,” he added.

This is good news for India and the country’s war chest at a time when other smaller economies face a looming crisis as they struggle with low foreign exchange reserves.

The country’s foreign exchange holdings (FCA) increased by $1.121 billion to $511.257 billion, and gold reserves increased by $1.14 billion to $39.642 billion during the week. ending July 29.

A significant part of the total reserves is made up of FCAs, which are expressed in dollars because the greenback is considered the world’s reserve currency and takes into account the rise or fall of non-US currencies, such as the euro, the pound sterling and the yen, held in foreign currency. reservations.

On Friday, the RBI increased its policy rate 50 basis points higher than expected to the highest since 2019, and hinted at further steps to stabilize inflation and the rupee.

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