India’s foreign exchange reserves fell to over a two-year low in the week ending October 14 as the Reserve Bank of India defended the rupee from sharp declines against a surging dollar.
In the week ending October 14, the country’s FX reserves fell $4.5 billion to $528.367 billion, from $532.868 billion in the week prior when they surprisingly rose $0.2 billion, according to the weekly statistical supplement data from the RBI.
Forex reserves have nosedived over $100 billion since Russia invaded Ukraine late in February, with the country’s import cover down nearly $114 billion from its peak late in October last year.
India’s forex reserves have fallen in 27 of the 34 weeks since late February.
The war on the edge of Europe has driven inflation higher. The resultant aggressive rate hikes by the US Federal Reserve pushed investors to abandon risky assets and shelter in dollar-denominated assets.
That safe-haven flows out of emerging economies has hurt the rupee, with the domestic currency down nearly 12 per cent this year and down from about 73 per dollar at the start of the year to well past 83 this week.
The US Federal Reserve’s aggressive rate hike path, growing current and trade account deficits domestically, and foreign investors continuing to sell risky assets on a global recession concerns are a few of the problems the rupee is facing.
The RBI has been intervening in both the spot and future markets to shield the rupee from steep declines.
The rupee ended flat on Friday against the king dollar, even as Treasury yields rose as the Indian central bank stepped in and limited any sharp losses after the currency crashed to a new all-time low in the previous session.
“The rupee was in a range of 82.60 to 82.90 per dollar after it opened weaker on higher US yields. But the RBI was active the entire day ensuring it does not suffer any further weakness. The US 10 year yields have been over 4.25 per cent – a 14-year high – keeping the dollar well bid against most Asian currencies, which have been weaker to the greenback,” said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors.
Recent trend and the rupee’s fall to a new record low of 83.29 to the dollar this week suggest more erosion in the country’s FX war chest as the RBI is expected to step in and sell dollars to limit any damage to the domestic currency.