India’s foreign exchange reserves fell to the lowest in more than two years, marking the third consecutive week of declines as the Reserve Bank of India, true to its word, intervened to prevent the rupee from weakening in the above 80 to the dollar for a week when the dollar jumped to two-decade highs.
RBI weekly statistical data showed the country’s foreign exchange reserves fell by $6.687 billion to $564.053 billion in the week ending August 19, marking their lowest level in more than two years and the third consecutive week of decline. The amount of the drop in the past week, $6.687 billion, was the largest since mid-July.
The previous week, during the week ending August 12, the country’s import cover had shrunk by $2.238 to $570.74 billion. With the exception of the increase in the last week of July, which appears to be a statistical error, the Indian forex war chest has shrunk every week since early July. It has fallen for 20 of the 26 weeks since Russia invaded Ukraine in late February.
This fall in foreign reserves of just over $67 billion since the Ukraine crisis and nearly $80 billion from its all-time highs last year echoes the rupee’s fall of around 74 for the dollar at nearly 80, a level that analysts say the RBI has fiercely defended.
The fate of the Indian currency has been determined by the rise of the dollar in international markets, driven by an outflow of capital into dollar-denominated assets and at the expense of almost all other major currencies in the world.
The Indian rupee eased against the greenback for the third consecutive week on Friday, as pressure from firmer oil prices and the dollar blunted some of the optimism from a report on adding from the Asian nation to a coveted emerging market bond index.
The Financial Times has reported that JPMorgan is seeking investors’ views on whether to make much of the Indian government bond market eligible for inclusion in its widely followed GBI-EM Global Diversified Index of debt in local currency.
However, Kunal Sodhani, vice president of Shinhan Bank’s global trading center, told Reuters that these inflows were insufficient to help the rupiah.
“I don’t think the report has anything to do with today’s session. The Rupee is weakening because the Dollar Index is nearing 109 and… no influx,” Mr Sodhani said.
“Oil has rebounded to $102, and that pressure is there because India’s underlying reality hasn’t changed. The trade deficit number is still a big concern.”
Due to the increase in imports of crude oil, on which the country depends for more than 80% of its oil needs, India the trade imbalance hit a record high of $31 billion last monthraising concerns about the country’s ability to maintain its current account.
“Dollar supply remains strong from oil marketing firms, while exporters also rush to lock in (higher forward) rates,” Arnob Biswas, head of research at SMC, told Reuters. Global Securities.
The rupee’s technical chart “looks tired” as the Reserve Bank of India may seek to defend the 80 levels on the one hand and strong demand for dollars from importers on the other, Biswas added.
To mitigate the impact of a geopolitical event on the wider economy, the RBI stepped in and openly stated that it would do whatever it takes to defend the rupiah against wild volatility.
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.
In doing so, the central bank reduced the country’s import cover.
Yet India’s foreign exchange reserves are the fourth largest in the world, according to RBI Governor Shaktikanta Das after the last rate-setting meeting when the central bank raised rates for the third consecutive time.
A report showed that India has built up buffers against cyclical difficulties and has ample foreign exchange reserves to withstand pressure on solvency, S&P Global Ratings said on Thursday.
Speaking at the India Credit Spotlight 2022 webinar, S&P Sovereign & International Public Finance Ratings Director Andrew Wood said the country has a strong external balance sheet and limited external debt, which makes debt service less. expensive.
“The country has built up buffers against cyclical difficulties like the ones we are experiencing now,” Wood said.
He added that the rating agency does not expect near-term pressures to seriously affect India’s creditworthiness.
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.
A separate Reuters report citing government and industry sources showed that India could offer incentives to exporters striking rupee deals to promote the attractiveness of the currency and increase commodity sales to Russia, which have been falling. due to Western sanctions.
After the RBI established a framework for international trade settlements 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 dodge sanctions the West imposed on Russia over its invasion of Ukraine.
According to these Reuters sources, bankers and dealers have yet to increase their use of the rupee for settlements as they are still awaiting further information on government and central bank incentives to use the rupee.
A separate 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, said reserves were depleted by 22% during the global financial crisis of 2008-09, compared to 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.
But for now, the current crisis is far from over and could mean further erosion of the country’s war chest.
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