India’s forex reserves have fallen by $110 billion in the last 13 months as the rising inflation, capital outflows and appreciating dollar created a turmoil in the foreign exchange market.
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According to the RBI, forex reserves fell by $4.854 billion to $532.664 billion during the week ended September 30 as the strong dollar and adverse external factors reduced India’s forex kitty. The reserves had declined by over $8.134 billion to $537.518 billion in the previous week. The central bank has been selling dollars from the forex kitty to defend the rupee amid pressures caused majorly by global developments. The rupee hit a record low of 82.33 against the dollar on Friday.
With this, forex reserves have plummeted by $110 billion from the record high of $642.45 billion registered on September 3, 2021.
Another major reason for the decline in forex reserves is capital outflows by foreign portfolio investors (FPIs) as the US Federal Reserve started the monetary policy tightening and interest rate hikes. The valuation loss, reflecting the appreciation of the US dollar against major currencies and decline in gold prices also played a part in the decline in foreign exchange reserves.
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RBI Governor Shaktikanta Das had recently said that about 67 per cent of the decline in reserves during the current financial year was due to valuation changes arising from an appreciating US dollar and higher US bond yields. “During the current financial year (up to September 28), the US dollar has appreciated by 14.5 per cent against a basket of major currencies. It (rupee) has depreciated by 7.4 per cent against the US dollar during the same period — faring much better than several reserve currencies as well as many of its EME and Asian peers,” he said.
Das said the rupee is a freely floating currency and its exchange rate is market determined. “The RBI does not have any fixed exchange rate in mind. It intervenes in the market to curb excessive volatility and anchor expectations,” he said while unveiling the monetary policy.
The aggressive policy course by the US Fed to curb rising price pressures is exacerbating fears of a weakening global growth outlook and leading to risk aversion in the markets. Global currencies depreciated against the dollar as a hotter than expected US inflation report drove the currency higher.
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Meanwhile, FPIs have resumed withdrawals from the Indian markets. “FPIs again turned sellers in India in September with a net equity sell figure of Rs 7,643 crore. FPIs were sellers in financial and IT services and buyers in telecom and capital goods. The renewed selling can be attributed to the steady rise in dollar which has triggered capital outflows from most emerging markets,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.
“FPIs turned marginal buyers in early October but there is no consistency in FPI activity. FPIs will turn sustained buyers only when dollar peaks and shows a sustained downtrend,” he said.
