Sliding $3.6 billion a week, Indian forex sees biggest drop of decade


New Delhi: India’s foreign exchange reserves have been falling steadily since the Russian-Ukrainian war broke out in February. According to the Reserve Bank of India’s (RBI) weekly statistical supplement, India’s foreign exchange reserves stood at $550.8 billion as of September 9, the lowest since 2020, when it stood at $580 billion. of dollars.

In the first week of January, India had foreign exchange reserves worth $633 billion, signifying a fall of more than $82 billion so far in the calendar year. – the strongest of the last decade.

Chart: Ramandreep Kaur | The footprint

Of the $82 billion that was wiped out in seven months, almost half of the loss was reported in the past three months. India’s foreign exchange reserves depleted by $12.7 billion in June, $14.4 billion in July and $20 billion in August, according to RBI data. Since the first week of June, Indian forex has plunged about $47 billion, or about $3.6 billion a week.

Running out at this rate, the fall in foreign exchange reserves in 2022 could be India’s biggest since the global financial crisis (GFC) of 2007-08. Last month in its bulletin, the RBI mentioned that during the GFC, foreign exchange reserves fell by about $70 billion.

In their analysis, RBI economists had estimated that by the end of July India’s foreign exchange reserves had been depleted by $56 billion, but mentioned that of this amount, $20 billion dollars were swap sells – which basically means it will go back to the RBI. So right now the true drop could be just over $63 billion, if put swaps are excluded.

Biggest burnout in a decade

This depletion, compared to the last 10 years, is probably the greatest that India has ever experienced. There were instances of depletion of India’s foreign exchange reserves at the end of the calendar year – 2011 ($0.6 billion), 2012 ($1.7 billion), 2013 (1, $8 billion) and 2018 ($13.28 billion) – but they were marginal in terms of size.

In the remaining years, India had reported an increase in its foreign exchange reserves, with 2020 – the year the Covid-19 pandemic hit the world – being the most lucrative year. That year, India’s foreign currency holdings increased by around $119 billion (to $580 billion by the end of 2020 from $461 billion at the end of 2019). At the end of 2021, it increased by $52 billion to $633 billion. On September 3 last year, India saw its forex hit a record high of $642.45 billion.

Chart: Ramandreep Kaur |  The footprint
Chart: Ramandreep Kaur | The footprint

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Why did this happen?

The depletion of foreign currencies meant that the RBI sold dollars to cope with the fall in the value of the rupee, which hit an all-time low of 80 rupees to the dollar in July.

One of the main reasons this happened was that the US Federal Reserve, the US central bank, raised key interest rates to control record inflation rates. This year, the US Fed has raised the lending rate four times so far – to 2.25-2.5% in August from 0.25-0.5% in March.

Through increases in lending rates, the US Fed seeks to contract the purchasing power of people using the dollar as their currency. As a result, foreign portfolio investors in India withdrew more than $39 billion over the past year, according to an analysis by the Economic period.

A study conducted by Saurabh Nath, Vikram Rajput and Goplakrishnan S. from the RBI’s Financial Markets Operations Department showed that during the GFC of 2008, forex exhaustion in India decreased by $70 billion. By the time their research was published (August 12), India’s foreign exchange reserves had already shrunk by $56 billion.

The crux of the study, however, was that expectations of rupee currency volatility – relative to previous economic shocks – had declined. Currency volatility is a measure of the frequency and magnitude of changes in the value of one country’s currency relative to another country’s currency.

The authors attributed that during the 2008 crisis, the decline in forex represented more than 22% of India’s total foreign exchange reserves, only 6% this time, simply because the country holds many more dollars today. today than 14 years ago. ($282 billion). “The Reserve Bank has been able to meet its intervention targets with a declining percentage drawdown on foreign exchange reserves,” the authors wrote.

Economist Radhika Pandey, a consultant at the National Institute of Public Finance and Policy (NIPFP), also believes that the situation is not too bad at the moment.

“Given the volatility of the global context, capital flows would oscillate between inflows and outflows. For now, the decline in reserves is not alarming. The reserve adequacy ratio remains comfortable. We are in a much better position than in the taper tantrum episode of 2014. But at the same time, if the dollar continues to stay strong, the RBI will have to let the rupee slide,” she said.

Rajeswari Sengupta, an associate professor at the Indira Gandhi Institute for Development Research in Mumbai, hinted that the RBI may need to revise its strategy.

“The 80 billion dollars [forex loss] is the price the RBI has to pay to defend the rupee and keep it below a certain threshold. But given the growing current account deficit, it might be safer to let the rupee run its own course. Rupee depreciation helps boost exports while losing reserves to avoid depreciation may not be a sustainable strategy,” she said.

(Editing by Tony Rai)

Read also : Why RBI’s hoarding of foreign exchange reserves on FX issues will be counterproductive


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