India’s foreign exchange reserves fell below $550 billion for the first time in nearly two years, Reserve Bank of India data showed on Friday, marking the seventh straight week that the country’s import coverage fell by nearly $30 billion.
The RBI’s supplementary weekly statistics showed that the country’s foreign exchange reserves fell by $5.219 billion to $545.652 billion in the week ended Sept. 16 from $550.871 billion in the previous week.
Analysts believe that the RBI’s intervention in currency markets to prevent a sharp weakening of the rupee against the dollar is the main reason for the decline in reserves, which is also partly due to exchange rate valuation adjustments.
Foreign reserves fell for seven straight weeks, shedding a total of $28.223 billion during the period, as the Reserve Bank of India sold dollars to protect the rupee from a sharp fall and breached its record low of more than $80 per dollar.
But the factor driving down the rupee and India’s import coverage is the dollar, the currency on the other side of the exchange rate.
Since the Russian invasion of Ukraine, investors have flocked to dollar-denominated assets, betting on safe-haven assets. The biggest impact of the Ukraine crisis has been a rise in commodity prices, which in turn sent global inflation soaring to multi-decade highs.
This has led to a tightening spree not seen in recent years by nearly all central banks, and even at the cost of a recession, the Federal Reserve has taken the lead, pushing the dollar to multi-decade highs against most major currencies.
The rupee has fallen sharply this year, from around 74 rupees before the Ukraine crisis to multiple record lows above 80 rupees, an unprecedented level.
An unprecedented decline in currencies on the other side of the dollar pushed the Reserve Bank of India’s foreign reserves faster than the Fed’s tapering scare in 2013.
Since Russia’s invasion of Ukraine, which Moscow says is a special operation, the country’s import guarantees have fallen by nearly $86 billion and are down about $97 billion from a peak in October last year.
Given the amount of losses, it took India almost a year to increase its foreign exchange reserves by about $60 billion to a peak, the best pace of growth in recent years.
The central bank had to spend the money for about six months to prevent the rupee from depreciating completely, but only to limit and stabilize the rupee against the rampant dollar depreciation.
If this week’s trading pattern is anything to follow, it is clear that the downward trend in foreign reserves is likely to continue as the rupee slumps to record lows this week, first breaching the stubbornly held 80-to-dollar level and then well above 81 on Friday. .
The rupee’s slump on Thursday and Friday is exactly why the Reserve Bank of India is defending its currency by burning its reserves. The latest move suggests the central bank may be willing to let the rupee depreciate.
A further breakdown of the RBI data showed that the decline in reserves for the week ended September 16 was due to a decline in foreign exchange assets (FCA), which accounted for a large portion of total reserves.
The FCA, expressed in US dollars, takes into account the effect of appreciation or depreciation of non-US currencies held in foreign reserves, such as EUR, GBP, and JPY. During the reporting week, FCA fell $4.698 billion to $484.901 billion.
The data showed that the value of gold reserves fell by $458 million to $38.186 billion.
In the reporting week, Special Drawing Rights (SDR) fell by $32 million to $17.686 billion and the country’s reserve position with the International Monetary Fund fell by $31 million to $4.88 billion, according to the Reserve Bank of India.