India's Forex Reserves Fall to 15-Month Low as RBI Defends Rupee
Comment of the Day

July 15 2022

Commentary by Eoin Treacy

India's Forex Reserves Fall to 15-Month Low as RBI Defends Rupee

This article from Bloomberg may be of interest to subscribers. Here it is in full:

India’s foreign exchange reserves dropped to their lowest in 15 months as the central bank probably stepped up its intervention to support the rupee that is testing new lows amid foreign capital outflows.

The reserves fell by $8.06 billion to $580.3 billion as of July 8, data released by the central bank showed Friday. This is the second straight week of decline and comes as the rupee nears the psychologically-important level of 80 per dollar.

While most emerging markets are seeing a sell-off on the US Federal Reserve’s rate-hike outlook, the Indian currency has lost about 7% this year, staying in the middle of the regional pack where the South Korean won has weakened by over 10% and the Philippine peso has shed over 9.5%.

A bigger import bill due to high commodity prices is also boosting demand for dollars, putting pressure on the local currency.

Monetary authorities in Singapore and Philippines on Thursday responded to the situation by going for emergency tightening. Some economists in India are factoring in the possibility of an unscheduled announcement by the Reserve Bank of India too. The central bank, which is due to announce its rate decision Aug. 4, had surprised with an off-cycle move in May.

At the current level, the reserves will cover less than 10 months of imports. Investors are worried that the drop in reserves leaves the rupee vulnerable to speculators, but even now these are much larger than they were during the taper tantrum of 2013, Bloomberg’s economist Abhishek Gupta wrote on Friday ahead of the data release. 

Eoin Treacy's view

India is in a better position to defend against surprises than at any time in its history. In 2008, reserves of $300 billion were considered healthy. Today they hold $580 billion which is down from a peak of $640 billion in August 2021. That has not done much to arrest the decline of the currency but it does provide the RBI some options.

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