India’s foreign exchange (FX) reserves fell below $600 billion for the first time in a year, weighed by persistent capital outflows and the rupee’s weakness driven by the dollar’s broad surge in recent months.
The latest data for the April 29 ending week from the Reserve Bank of India (RBI) released on Friday showed the country’s FX reserves fell by $2.695 billion to $597.728 billion, marking the eighth straight week of declines. The last time the country’s import cover fell below the $600-billion-mark was during the week ending May 28, 2021.
The latest week’s data was also the lowest since end-April last year when the country was battling its worst wave of the coronavirus pandemic. Back then, hospitals across the country were scrambling for beds and oxygen in response to a deadly second surge in infections; the World Health Organization (WHO) had said in a report that India accounted for nearly half the coronavirus cases reported worldwide and a quarter of the deaths during that period.
This year, though, the fallout from the Russia-Ukraine war has weighed on global supply chains, leading to runaway inflation and, in turn, has forced major central banks on a tightening policy path.
India’s forex reserves have declined nearly $34 billion, or about 5.4 per cent, since Russia invaded Ukraine on February 24. That import cover wiped out in just two months is about what the country took to build in a year.
The fall in FX reserves started during the week ending March 11, when the rupee hit its all-time lows.
The Indian currency’s weakness was driven largely by the greenback’s broad surge led by expectations of a very aggressive US Federal Reserve’s monetary policy path and the RBI’s intervention through dollar sales by Indian state-run banks.
While the import cover is still a healthy near-$600 billion, it has fallen to its lowest in a year, and the latest trade moves in the rupee point to further erosion of the country’s FX war chest.
Indeed, the rupee reversed four sessions of gains and slumped on Friday to 76.90, very close to its all-time low, with analysts suggesting the RBI shored up the rupee from falling to fresh record lows.
According to Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services, the rupee fell as the broad strength in the dollar continued to weigh on major crosses.
“Earlier in the week, the rupee rose after the RBI decided to raise rates by 40 bps and hiked CRR by 50 bps, Mr Somaiya told PTI. But the currency’s gains were restricted after the Federal Reserve too raised rates and maintained a hawkish stance, he added.
Sriram Iyer, Senior Research Analyst at Reliance Securities, told PTI that dollar sales by state-run banks, suspected on behalf of the central bank, capped further weakness in the rupee.
“The Indian rupee tumbled against the US dollar on Friday and depreciated this week as risk appetite weakened amid mounting concerns about inflation that may trigger more aggressive rate hikes by the global central banks,” he added.