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India

Rupee At Record Low, Dwindling Forex Reserves May Add To India’s Fiscal Woes

More worryingly, the rupee is likely to fall further, with the US Federal Reserve hinting at more aggressive rate hikes to tame inflation. All this, experts say, could add to India’s woes.

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Image used for representative purposes only. (Source: Pexels)

New Delhi: In October 2021, India’s foreign currency reserves were at a record level of US Dollar 642 billion. Less than a year later, the reserves are down by a whopping US $92 billion, possibly the highest-ever fall in less than a year.

Much of this fall, according to several reports, can be attributed to sale of US dollar from its reserves by the country’s central bank – the Reserve Bank of India (RBI) – in an attempt to keep the Indian Rupee holds its own vis-à-vis the strengthening the US Dollar.

However, it now seems that the RBI efforts are failing, since the Rupee today crossed its lowest value-ever – Rs 80.28 for a US dollar. The latest fall is being directly attributed to the US Federal Reserve hiking rates by 75 basis points, the third consecutive rate hike.

The decline in the forex reserves and value of rupee corresponding with an up-tick in imports, reports suggest, would mean that the forex reserve pool is now adequate to cover about nine months of imports compared to 16 months at the peak.

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More worryingly, the rupee is likely to fall further, with the US Federal Reserve hinting at more aggressive rate hikes to tame inflation. All this, experts say, could add to India’s woes.

The US Federal Reserve has hiked interest rates by 75 basis points, with the US dollar index hitting new 20-year high at 111.72. The two-year US Treasury yield also climbed above 4 per cent and the yield curve inverted further, according to a report.

And while this decline takes place, just last week, RBI data shows, it sold a net of $38.8 billion from its forex reserves between January and July this year.

A net of $19 billion was sold in July alone, the most recent data available, and intervention remained heavy in August when the rupee fell below 80 against the dollar, traders were quoted as saying by news agency Reuters.

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, bonds, treasury bills, and other government securities.

The report on the forex reserves going to a record low saw economists saying that India’s central bank was using up its foreign exchange reserves at a quicker pace than during the taper-tantrum period in 2013 as it tries to prevent an overshoot in the rupee. They however said that a larger pool of reserves may allow it to support the currency for some more time.

The Reserve Bank of India has sold a net of $38.8 billion from its forex reserves between January and July this year, data released last Friday showed.

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Liquidity in India’s banking system is likely to remain in deficit in the second half of this financial year as credit growth picks up and the circulation of currency notes rises, analysts said to Reuters. The country’s banking liquidity slipped into deficit on Tuesday for the first time in over three years, according to data from the Reserve Bank of India.

A widening liquidity deficit could lead to a rise in short-term borrowing rates and prompt the Reserve Bank of India to pump in money into the banking system through repo auctions and slow down its interventions in the currency market.

In August, foreign institutional investors (FIIs) purchased Indian shares worth Rs 46,893 crore, according NSDL data, indicating institutional investors were coming back to India “after dumping Indian shares for eight months in a row starting October last year.”