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India’s foreign exchange reserves have declined by $11.355 billion since the beginning of FY23, even as the Reserve Bank of India (RBI) mounted defence of the rupee by selling dollars.
In sharp contrast, the reserves had seen an accretion of $12.481 billion in the same period a year ago (March-end 2021 to May 7, 2021).
As at May 6, 2022, India’s forex reserves stood at $595.954 billion. The rupee has depreciated about ₹1.80 since March-end 2022. The reserves, which had crossed the $600 billion mark for the first time on June 4, 2021, to stand at $605.008 billion, reached a peak on September 3, 2021, to stand at $642.453 billion.
Measured defence expected
Market experts opine that RBI may be in a position to deploy another $45-50 billion of reserves to tamp down volatility in the USD-INR pair. However, the defence of the rupee is expected to be measured, allowing it to depreciate when other emerging market economy currencies too weaken.
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Among peer BRICS (Brazil, Russia, India, China and South Africa) currencies, only Russian ruble and Brazilian real have appreciated against the dollar.
The rupee hit an all-time intraday low of 77.6250 per dollar on May 12. It closed at 77.45 on May 13 (Friday).
Global conditions
The Indian currency is weakening due to the likelihood of the US Fed ramping up interest rates more aggressively. This, in turn, is pushing foreign portfolio investors (FPIs) to cut their holdings in emerging market economy financial markets — including India — and deploy the proceeds in safe haven assets in advanced economies.
Moreover, higher global commodity prices — including crude oil — are weakening the Indian currency.
‘Uneasy situation’
Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, observed that the fall of the rupee to new lows, breaching the psychological level of 77, with spike in volatility, underscores the uneasy situation in the market.
He noted that this is reflective of the turbulence in broader markets globally, and the limited choices before the RBI in managing the exchange rate, even with forex reserves at seemingly comfortable levels of close to $600 billion.
“The strategy being adopted by RBI would increasingly align with interventions in non-deliverable forward (preferably in near months where liquidity is more) and currency futures, with intervention in spot market playing the second fiddle.
“That also saves the reserves, with only settlement of differential amount with counterparties on maturity dates. That should re-instil confidence in the Central Bank’s role as a neutral, confidence building regulator, whose primary job would be to reduce volatility without nudging rupee to any specific levels,” Ghosh said in the Bank’s Ecowrap report.
He opined that the rupee is not expected to breach the levels of 80 per dollar, and will instead show an appreciative bias over time.
Containing depreciation
Aditi Nayar, Chief Economist, ICRA, said the deterioration in the current account deficit, monetary policy tightening across the globe, and risk aversion towards emerging market assets are expected to impart a depreciating bias to the rupee.
However, large forex reserves, narrower inflation differentials and the likely stemming of FII (foreign institutional investor) debt outflows would contain further depreciation from the recent record low.
Nayar expects the rupee to trade between 75.0–79.0 per dollar in the remainder of H1 (April-September) FY23.
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