- Friday, May 10, 2024
By: Shubham Ghosh
IN a news that would leave economic experts a worried lot, India’s foreign exchange reserves reached their lowest point in 15 months as the Reserve Bank of India (RBI), the country’s central bank, probably increased its intervention to back the rupee which has witnessed a free fall amid foreign capital outflows, Bloomberg reported.
The reserves fell by $8.06 billion to $580.3 billion as of July 8, data released by RBI showed on Friday (15).
This marked the second straight week of the reserves’ decline and comes when the rupee is nearing the 80-level mark per US dollar.
While the central bank said in its financial stability report unveiled on June 30 that India’s current level of foreign reserves is adequate to meet imports of nearly 10 months projected for the current year, questions are still being raised as to why this fall is taking place.
Moneycontrol explained in a report why the Indian foreign reserves are witnessing a fall.
The first reason is the ongoing Russia-Ukraine war. Since the outbreak of the war some months ago, significant funds have flown out from the domestic market. In July, the foreign portfolio investors (FPIs) have withdrawn $543.94 million from Indian financial markets, National Securities Depository have shown in its data, Moneycontrol said.
“Whenever there is any geopolitical crisis, investors tend to rush towards the safe-haven currency like the dollar. So they dumped emerging market assets and thus there have been capital outflows from the Indian market,” the report quoted Sugandha Sachdeva, vice-president, commodities and currency research at India’s Religare Broking, as saying.
The report also said that till date in 2022, the FPIs have withdrawn $30.3 billion from Indian financial markets, the National Securities Depository has said.
Soaring crude oil prices are another reason why the foreign exchange reserves have gone down. This has resulted in widening of India’s trade deficit and pushed up the current account deficit figures.
“The import bill goes higher and we need to pay more money if the price of oil is rising, which means more outflow of dollars leading to higher trade deficit,” Kunal Sodhani, assistant vice-president, Shinhan Bank, Global Trading Center, forex and rates treasury, told Moneycontrol.
The growing strength of the dollar has caused the foreign currency assets (FCA) accounts suffering and that has also impacted India’s foreign exchange reserves. Researchers have told Moneycontrol that a large part of the forex reserves is through the FCA accounts and in that, the dollar, euro and pound make up a significant portion. But after the Ukraine war started, both pound and euro took a beating and that affected India’s foreign exchange reserves.
Besides, analysts said that the RBI, in its effort to safeguard the falling rupee, ended up exhausting the foreign exchange reserves to some extent.
“The RBI sold dollars to protect the rupee from depreciation. They are not protecting any level but supplying dollars at every spike to ease the volatility,” Saurabh Goenka, CEO and MD, Zenith FinCorp, was quoted as saying by Moneycontrol.