Forex reserves fall to $545.65 billion for a 2-year low. Know the reasons & Its Impact on you.
As the US Federal Reserve fights decades of high inflation with higher interest rates, the rupee depreciates against the dollar, prompting the Reserve Bank of India to intervene in the currency markets to reduce volatility.
India’s foreign exchange reserves are running out. Part of the Reserve Bank of India‘s (RBI) mandate is to intervene in the foreign exchange market, which it does by selling or buying dollars to curb excessive volatility in the rupee. Experts say this could be one of the reasons why India is experiencing depletion of its foreign exchange reserves.
Foreign exchange reserves at this point are the lowest since October 2020.
Foreign exchange reserves India’s currencies fell for the seventh week in a row and fell to US$545.652 billion in the week ended September 16, the lowest level since October 2, 2020, the Reserve Bank of India weekly statistical supplement showed on Friday. India.
Reserves that fell as the central bank used the fine to push the rupee amid the main global developments caused pressure from falling $2.23 billion to $550.87 billion in the previous week. Although the drop in reserves is partly due to valuation changes, analysts believe that much of the decline was due to the Reserve Bank of India’s intervention in the foreign exchange market to prevent the rupee from depreciating further against the dollar.
A decline was also seen in Foreign Currency Investments (FCA), a key component of general reserves, according to Statistical Supplement Weekly published by the Reserve Bank of India (RBI) Friday. The central bank said that FCA was down $4,698,000 to $484.901 billion in the week of the report. In dollar terms, FCAs include the Effect of appreciation or depreciation of non-US entities such as euros, pounds and yen held in foreign exchange reserves.
Meanwhile, after a turbulent week, the rupee stabilized at Friday’s close, falling below 81 per dollar to hit a record low earlier in the session, prompting the RBI to intervene.
The country’s reserve position with the IMF fell by $31 million to $4.88 billion in the reporting week, data shows.
Rupee Position: The rupee has officially crossed the 81 thresholds versus the dollar. The rupee fell so much during Friday’s trade that it reached a high of 81.23. At the close of business, there was a slight recovery, though. In spite of this, the rupee declined by 19 pence to end the day at Rs. 80.98 to the dollar. The Indian rupee has never closed at such a low level prior to now.
Foreign exchange reserve level:
According to the latest RBI data, foreign exchange reserves fell to $545.652 billion in the week of September 16. Last week’s reserves were $550.871 billion. This is the two-year low in foreign exchange reserves. Now the question arises, how will you pay for the weakening of the rupee or the depletion of foreign exchange reserves?
Reason for the rupee weakening:
Due to the continued strengthening of the dollar, the US currency in foreign markets has weakened the rupee. The dollar index, which measures the dollar’s strength against the world’s six major currencies, rose 0.72 per cent to 112.15. The dollar remains strong as the US Federal Reserve hiked interest rates by 75 basis points for the third consecutive day.
Indeed, foreign investors are attracted to US market gains due to rising interest rates, because of which the dollar strengthens. In contrast, the selling environment has returned in the Indian market. Investors are withdrawing money from the market, so the rupee has also weakened.
What will be the impact:
Due to the weakening of the rupee, India’s import bill will increase.
India will have to spend more money on imports than before. The weakening of the rupee means that the margins of import-dependent companies are falling, which is being offset by rising prices. This will increase inflation. India’s dependence on imports is high, especially on petroleum products. Also, travel abroad, use of services from abroad, etc. It will also be expensive.
Effect on foreign exchange reserves:
The weakening of the rupee weakens foreign exchange reserves. If the country has to spend more money on imports, then it is clear that the treasury will be empty. From an economic perspective, that’s not good.
According to former RBI Gov. D. Subbarao, the current level of foreign exchange resources relative to GDP, which in turn is a proportion of foreign debt, so by these standards, the current level of reserves is significantly better than before.
“However, I think the RBI sold $50 billion worth of assets in the previous six months to support this kind of transformation. So the market seems to be not only on the level of reserves but also on how quickly they are depleted. If a bank continues to spend $ to defend the exchange rate and the market feels that reserves are falling faster than expected, even though the level of reserves themselves is [relatively] safe, there can be a significant negative impact,’ said the former governor.
Edited by Prakriti Arora