Rupee's Latest Record Lows Are Ominous Signs For Nosediving Forex Reserves

India's foreign exchange reserves have nosedived since the rupee started to hit new all-time lows in March, days after Russia invaded Ukraine, which resulted in massive capital outflows from emerging markets assets as investors sought safe-haven assets.

With the Reserve Bank of India participating actively in the spot and futures FX markets to defend the fledgling rupee, the country's import war chest has declined for nine weeks in a row since early March. 

In March, the rupee hit its first record low for the year, breaking below 76.9050 per dollar, which was last touched on April 22, 2020, amid the COVID-19 pandemic.

Reuters reported that the RBI sold $20.1 billion in March's spot foreign exchange market to support the rupee against the dollar.

Over the last two weeks, the Indian currency has been hitting multiple record lows on the back of broad strength in the dollar and severe risk aversion. The RBI limited sharp declines by intervening in open markets to defend the currency.

According to the weekly statistical supplement data, for the week that ended on May 6, foreign exchange reserves fell to $595.954 billion, marking the ninth consecutive week of declines and the lowest since late March last year.

Weak rupee performance and the RBI selling dollars via state-run banks suggest India's import cover is likely to fall further. 

The FX war chest has declined by about $36 billion since Russia attacked Ukraine, which took the country over a year to build. And the import cover is down 7 per cent from a record high of $642.45 billion in reserves in early September last year.

While the RBI has said the exchange rate movement is a broad global trend, the central bank has been participating in the market to shore up the rupee when the currency has fallen to fresh lows. 

Sources told NDTV that the RBI will continue to do so, albeit to control the rupee's "jerky movements."