India’s foreign exchange reserves fell below $550 billion for the first time in nearly two years, marking a seventh straight week of decline, during which the country’s import cover fell by nearly $30 billion, data from the Reserve Bank of India showed on Friday. RBI’s weekly statistical supplementary data showed that the country’s foreign exchange reserves fell by $5.219 billion to $545.652 billion in the week ended September 16, compared to $550.871 billion in the previous week.
Analysts believe that the RBI’s intervention in currency markets to prevent the rupee from weakening sharply against the dollar is the main cause of the decline in reserves, which can also be partly attributed to exchange rate adjustments. Forex reserves fell for seven straight weeks, reaching a total erosion of $28.223 billion during the period, as the RBI sold dollars to protect the rupee from falling sharply and breaking past its record low of over 80 to the dollar.
But the factor that caused the rupee and India’s import cover to fall was the currency on the other side of the exchange rate, the dollar. Since Russia invaded Ukraine, investors have flocked to dollar-denominated assets in “flight to safety” bets. The biggest consequence of the Ukrainian crisis was an increase in commodity prices and, subsequently, a global increase in inflation to the highest level in several decades.
That sent nearly every central bank into a tightening frenzy not seen in years, with the U.S. central bank leading the pack even at the cost of a recession and pushing the dollar to multi-decade highs against most major currencies. The rupee has fallen dramatically this year, from around 74 before the Ukraine crisis to multiple record lows of more than 80 to the dollar, a level never seen before.
An unprecedented plunge in currencies listed on the other side of the dollar has pushed the RBI through its foreign reserves faster than the Fed’s tapering tantrum in 2013. The country’s import cover has fallen by nearly $86 billion since Russia’s incursions into Ukraine, which Moscow calls a special operation, and by about $97 billion since its peak in October last year. To put this volume of losses in context, it took India nearly a year to add about $60 billion to its foreign exchange war chest at the peak, its best growth rate in years.
The central bank had to spend that amount and some over six months or so not to stop the complete weakening of the rupee, but only to contain and stabilize the falling rupee against the surging dollar. If the trading pattern is anything to go by this week, then it’s clear that the trend of declining forex reserves is likely to continue as the rupee plunged to fresh all-time lows this week, first stubbornly holding at 80 per dollar and then well beyond 81 on Friday.
The sharp fall in the rupee on Thursday and Friday was exactly what the RBI was defending the domestic currency against by burning through reserves. The latest moves suggest the central bank may be willing to let the rupee weaken. A further breakdown of the RBI data showed that the drop in reserves in the week ended September 16 was due to a decline in foreign currency assets (FCA), a significant part of total reserves.
FCAs, which are expressed in dollar terms, take into account the impact of appreciation or depreciation of non-US currencies held in foreign exchange reserves, such as the euro, pound and yen. During the reporting week, FCA fell by $4.698 billion to $484.901 billion. The data showed that the value of gold reserves fell by $458 million to $38.186 billion. According to the RBI, the Special Drawing Rights (SDRs) declined by USD 32 million to USD 17.686 billion in the week under review and the country’s reserve position with the IMF fell by USD 31 million to USD 4.88 billion.
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