Forex Reserves Slump To Over 2-Year Low As RBI Defends Rupee To Below 80

India’s forex reserves slumped to the lowest in over two years, marking the third straight week of decline as the Reserve Bank of India, true to its word, intervened to keep the rupee from weakening past 80 per dollar during a week when the dollar surged to over two-decade highs.

The RBI’s weekly statistical data showed the country’s foreign exchange reserves fell by $6.687 billion to $564.053 billion in the week ending August 19, marking its lowest in over two years and the third week of decline in a row. The quantum of fall in the latest week, $6.687 billion, was the largest since mid-July.

In the week prior, during the week ending August 12, the country’s import cover had declined by $2.238 to $570.74 billion. Barring the increase in the last week of July, which seems like a statistical blip, India’s forex war chest has declined every single week since early July. It has fallen for 20 of the 26 weeks since Russia invaded Ukraine in late February.

That slump in forex reserves by a touch over $67 billion since the Ukraine crisis and nearly $80 billion from its all-time highs last year echoes the slide in the rupee from about 74 per dollar to near 80, a level which analysts say the RBI has defended ferociously.

The fate of the Indian currency has been driven by the rampant dollar in international markets, driven by an exodus of capital into dollar-denominated assets and at the cost of almost every other major currency in the world.

On Friday, the Indian rupee marked easing against the greenback for the third week running, as pressures from firmer oil prices and the dollar blunted some of the optimism from a report about adding the Asian nation to a coveted emerging-market bond index.

The Financial Times reported that JPMorgan is seeking investor views on whether to make a large chunk of the Indian government bond market eligible for inclusion in its widely tracked GBI-EM Global Diversified index of a local currency debt.

However, Kunal Sodhani, vice president of the global trading centre at Shinhan Bank, told Reuters that these inflows were insufficient to help the rupee.

“I don’t think the report has anything to do with today’s session. The rupee is weakening because the dollar index is inching closer to 109 and…there are barely any inflows,” Mr Sodhani said.

“Oil has bounced back to $102, and that pressure is there because the underlying reality of India has not changed. The trade deficit number is still a great concern.”

Due to rising crude imports, which the country relies on for over 80 per cent of its oil needs, India’s trade imbalance increased to an all-time high of $31 billion last month, raising concerns about the country’s ability to maintain its current account.

“The bid for dollars remains strong from the oil marketing companies, while exporters too are jumping in to lock in (higher forward) rates,” Arnob Biswas, head of research at SMC Global Securities, told Reuters.

The technical picture for the rupee “looks tired”, with the Reserve Bank of India possibly seeking to defend the 80 levels on the one hand and strong dollar demand from importers on the other, Mr Biswas added.

To blunt a geo-political event’s impact on the wider economy, the RBI has intervened and has openly said it would do whatever it takes to defend the rupee from wild volatility.

While the rupee briefly hit its all-time weak level of 80 against the dollar, the RBI has helped keep the Indian currency below that level by selling dollars in the spot and futures markets.

In doing so, the central bank has drawn down the country’s import cover.

Still, India’s forex reserves are the fourth largest globally, according to RBI governor Shaktikanta Das after the latest rate-setting meeting when the central bank hiked rates for the third consecutive time.

A report showed that India has built up buffers against cyclical difficulties and has ample foreign exchange reserves to withstand pressure on credit worthiness, S&P Global Ratings said on Thursday.

Speaking at the India Credit Spotlight 2022 webinar, S&P Sovereign & International Public Finance Ratings Director Andrew Wood said the country has a strong external balance sheet and limited external debt, making debt servicing not so expensive.

“The country has built up buffers against cyclical difficulties like those, which we are experiencing right now,” Mr Wood said.

He added that the rating agency does not expect the near-term pressures to impact India’s credit worthiness seriously.

The RBI has a stated policy of intervening in the forex markets if it sees volatilities, but the central bank never lets out a targeted level. In the current episode, it has successfully defended the rupee depreciating above the 80-per-dollar-mark.

A separate Reuters report quoting government and industry sources showed that India might offer incentives to exporters settling deals in rupees to promote the currency’s attractiveness and raise the sales of commodities to Russia, which have decreased due to western sanctions.

After the RBI established a framework for international trade settlements using the rupee last month, the measure is intended to increase Russian commerce. Indian businesses are already exchanging dollars and euros for Asian currencies to settle transactions to dodge the sanctions the West has imposed on Russia due to its invasion of Ukraine.

According to those Reuters sources, bankers and dealers have not yet increased their usage of the rupee for settlements since they are still waiting on further information about the government’s and central bank’s incentives to use the rupee.

A separate study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S from the RBI’s financial markets operations department, which does not represent the central bank’s views, said the reserves were depleted by 22 per cent during the 2008-09 global financial crisis as compared to only 6 per cent in the current episode following Russian invasion on Ukraine.

On an absolute basis, the 2008-09 global financial crisis led to a drawdown of $70 billion in the reserves, which came down to $17 billion during the COVID-19 period and stood at $56 billion as of July 29 this year due to the Ukraine invasion-related impact.

But for now, the current crisis is far from over and may mean a further erosion in the country’s forex war chest.