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Is the Indian Economy in Danger as Forex reserves have dropped by more than $80 billion since the Ukraine crisis, reaching a two-year low?

A point of concern for economic experts

Since the outbreak of the war in Ukraine earlier this year, India’s forex reserves have fallen by more than $80 billion (£69.3 billion), with a drop of more than $2 billion (£1.73 billion) in the last week as the Reserve Bank of India (RBI) sold dollars to keep the rupee from falling below the 80-per-dollar mark.

Despite a continuous inflow of foreign money into the country’s markets, the country’s expanding current account deficit also hasn’t helped to halt the decline in import cover.

The recently released data about Forex

In accordance with the most recent weekly statistics data from the RBI, Forex reserves fell $2.234 billion (£1.93 billion) to $550.871 billion (£484.2 billion) in the week ending September 9, from $553.105 billion (£479.4 billion) the previous week, which represented the worst over two years.

This pattern was seen in rupee market fluctuations throughout August and the current month.

Statistics in the range of last 1 year

From their peak in October of last year, foreign exchange reserves in the country have fallen by more than $90 billion.

The raising concerns for Rupee

The rupee has dropped sharply this year, from about 74 to a poor record low of more than 80 per dollar, with the RBI stepping in to save the currency from experiencing excessive violent swings.

The RBI’s latest monthly bulletin, released on Friday, revealed the central bank sold a net $19.05 billion in foreign exchange in July, lending some credence to this.

Bad news waving from the market

On Friday, Indian stocks collapsed, wiping out the previous week’s gains and increasing losses. This implies that the RBI would withdraw more funds from its reserves in order to secure the rupee.

The chronological downfall of the rupee

  • With the exception of the last week of July, which appears to be a momentary blip, India’s FX reserve fund has dropped every week since early July.
  • Since Russia’s invasion of Ukraine in late February, it has declined for 20 of the 26 weeks.
  • Since the Ukraine crisis, foreign reserves have fallen by almost $67 billion, leaving nearly $80 billion from their all-time highs.

The fate of the Indian currency

The plight of the Rupee has been determined by the wild dollar in international markets, which has resulted in an outflow of money into dollar-denominated assets at the expense of nearly every other major currency around the globe. The RBI has stepped in and publicly admitted that it will do all it takes to protect the rupee from market turmoil.

Is this the end of the Indian economy, or is there still hope?

  • Meanwhile, India’s currency reserves are the fourth highest in the world, according to RBI governor Shaktikanta Das following the most recent rate-setting meeting, at which the central bank raised rates for the third time in a row.
  • According to S&P Global Ratings, India has strengthened buffers against periodic challenges and has adequate foreign exchange reserves to resist pressure on financial health.
  • Also because the government has a good external balance sheet and limited external debt, debt service is not as burdensome.
  • According to related sources, citing government and industry, India may give incentives to exporters who settle transactions in rupees to boost the currency’s attractiveness and increase commodity shipments to Russia, which has declined to owe to Western sanctions.

Earlier slip of rupee

  • During the week ending March 11, 2022, India’s foreign currency reserves(Forex) declined by $9.64 billion to $622.275 billion as the rupee depreciated against the US dollar amidst rising crude oil prices and capital outflows owing to continuous selling by foreign portfolio investors (FPIs). This was the largest drop in reserves in over two years, following an $11.98 billion drop during the week of March 20, 2020, when the Covid-19 outbreak struck India and FPIs withdrew cash.
  • In monetary terms, the 2008-09 global financial meltdown resulted in a $70 billion loss in Forex, which fell to $17 billion during the COVID-19 phase and was at $56 billion as of July 29 this year owing to the impact of the Ukraine invasion.

Forex

Why did the reserves fall?

The Reserve Bank of India (RBI) traded dollars to keep the rupee from falling below the 77 levels as the Russia-Ukraine crisis worsened and crude oil prices rose. When the rupee crossed the 76-level and was on its way to the 77-level, the RBI intervened by selling dollars through PSU banks.

Whenever the reserve bank sells dollars in the Forex market, it withdraws an equal amount in rupees, making a compromise in the rupee liquidity in the system.

The forex reserves’ pillars

Foreign currency assets (FCA), gold holdings, and IMF SDRs (special drawing rights) are the major components of Forex reserves. To boost the rupee, the RBI sold dollars from its FCA, which is held in global central banks, foreign banks, and foreign assets.

  • Foreign currency assets include the effect of the dollar’s appreciation or depreciation as well as non-US units such as the euro, pound, and yen held in international exchange reserves. According to the most current RBI statistics, India’s foreign currency assets (FCA), the main component of its foreign exchange reserves, declined by $2.519 billion to $489.598 billion for the week ended September 9, compared to a decrease of $6.527 billion to $492.117 billion the previous week.
  • The value of gold reserves, on the other hand, grew by $340 million to $38.644 billion.
  • During the reporting week, SDRs declined by $63 million to $17.719 billion, but the country’s reserve position with the IMF improved by $8 million to $4.91 billion.

After effects of words

Global markets tumbled as IMF spokesperson Gerry Rice voiced concern about a future global economic slowdown and indicated that certain countries are expected to enter a recession in 2023. Only time will tell if India is one of them, or if the Indian rupee is lucky enough to avoid the approaching recession!!

The consecutive plan

The dollar reached a new record high as investors increased their bets on the Federal Reserve raising interest rates, while the World Bank and the International Monetary Fund warned of weaker economic growth and rising inflation, marking the rupee’s worst week.

forex reserves

The dollar is continuously soaring to new highs against the bulk of global currencies, thus the attention will likely stay on the country’s diminishing foreign exchange reserves(Forex) for the near future. The current crisis is far from getting finished, and it is possible that the country’s foreign exchange reserves may get tortured more.

Chakraborty

Chakraborty is a Journalist at Inventiva who drafts content on current social topics. Her forte is documenting opinionated content based on data, facts, and numbers while adhering to media ethics, which go beyond simply crafting news headlines. Her core intent in writing such content is that every word her viewers read should give meaningful insights to their time spent on the articles.

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