The fall in FX reserves began during the week ended March 11, when the rupee hit its all-time low.
New Delhi:
India’s foreign exchange (FX) reserves fell below $600 billion for the first time in a year, weighed on by continued capital outflows and a weakness in the rupee driven by the broader dollar’s jump in recent months.
The Reserve Bank of India’s (RBI) latest data for the last week of April 29, released on Friday, showed that the country’s foreign exchange reserves fell from $2.695 billion to $597.728 billion, marking the eighth week of decline. The last time the country’s import cover fell below $600 billion was during the week ending May 28, 2021.
The latest week’s data was also the lowest since late April last year when the country was battling the worst wave of the coronavirus pandemic. At the time, 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 accounts for almost half of the reported coronavirus cases worldwide and a quarter of the deaths during that period.
This year, however, the fallout of the Russo-Ukraine war has hit global supply chains, making inflation runaway and, in turn, forcing major central banks on a tighter policy path.
India’s foreign exchange reserves have declined by about $34 billion, or about 5.4 per cent, since Russia’s invasion of Ukraine on February 24. This import cover has been wiped out in just two months, which the country has taken to make up for a year.
The fall in FX reserves began during the week ended March 11, when the rupee hit its all-time low.
The weakness of the Indian currency was largely driven by the US Federal Reserve’s monetary policy trajectory and expectations of RBI intervention through dollar sales by Indian state-run banks.
While the import cover is still healthy at around $600 billion, it has fallen to its lowest level in a year, and the latest trade in the rupee points to further erosion of the country’s FX war chest.
Indeed, the rupee reversed four sessions of gains and slipped to 76.90 on Friday, very close to its all-time low, with analysts suggesting the RBI saved the rupee from falling to new record lows.
According to Gaurang Somaiya, Forex and Bullion Analyst at Motilal Oswal Financial Services, the rupee continued to depreciate due to broader strengthening of the dollar.
Mr. Somaiya told PTI, “Earlier this week, the rupee had risen after 40 bps hike in rates by RBI and 50 bps in CRR. After retaining the currency gains were restricted.” He added.
Shriram Iyer, Senior Research Analyst, Reliance Securities, told PTI that dollar selling by dubious PSU banks by the central bank further weakened the rupee.
“The Indian rupee fell against the US dollar on Friday and depreciated this week as risk appetite weakened amid rising concerns about inflation, which could lead to more aggressive rate hikes by global central banks,” he said.