Forex Reserves Have Fallen Over $80 Billion Since Ukraine Crisis To 2-Year Low

India's forex reserves have nosedived over $80 billion since the Ukraine crisis, with more than $2 billion fall in the latest week as the Reserve Bank of India sold dollars to shore up the rupee from breaching the 80-per-dollar level.

The latest RBI weekly statistical data showed that forex reserves fell $2.234 billion to $550.871 billion in the week ending September 9, from $553.105 billion in the week prior, which was the lowest level in almost two years.

India's import cover has fallen for six straight weeks and 23 out of 29 weeks since Russia invaded Ukraine late in February, reflecting the RBI's constant draw down from the reserves to fight a surge in the US currency due to capital outflows into dollar-denominated assets.

Compared to the country's forex reserves peak in October last year, the FX war chest is down over $90 billion.

Despite a steady flow of foreign capital into the country's markets, a widening current account deficit has not helped stem the fall in the import cover.

The rupee has crashed dramatically this year from about 74 against the greenback to a weak record level of over 80 per dollar, with the RBI stepping in to manage the currency from extreme wild swings.

That was partly confirmed by the RBI's latest monthly bulletin released on Friday, which showed the central bank sold a net $19.05 billion in the spot foreign exchange market in July.

Market moves in the rupee suggest that trend continued through August and this month.

The decline in the country's forex reserves is likely to be the theme for a while, with the dollar still gaining ground to new peaks not seen in over two decades against most major currencies.

The rupee marked its worst week in five on Friday as the dollar soared to a new record high on larger-sized Federal Reserve rate hike bets and as the World Bank and the International Monetary Fund warned of slowing economic growth with a surging inflation backdrop.

A foreign exchange trader told Reuters that market participants were wary that the rupee had not been allowed to weaken past 80 per dollar and saw it as a level to protect.

Indian shares crashed on Friday in a market bloodbath, with equity benchmarks erasing gains for the week and extending their losses for the third straight session, tracking a global sell-off from looming recession risks from the broadest and most aggressive policy tightening in decades.

That suggests more RBI drawdown from the reserves to protect the rupee from wild gyrations.

We expect the rupee to trade with a negative bias on the strong dollar and risk aversion in global markets. Global markets declined after IMF spokesman Gerry Rice flagged concerns over a further slowdown in the global economy and said that some countries are expected to slip into recession in 2023," Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas, told PTI.

While the fall in forex reserves has been significant this year, the country has still managed to fare better than its emerging market peers, where the import cover has fallen to crisis levels.

A breakdown of the latest RBI data showed that India's foreign currency assets (FCA), which are the biggest component of the forex reserves, dropped by $2.519 billion to $489.598 billion during the week ended September 9, compared to a decline of $6.527 billion to $492.117 billion in the week before the reporting period.

The value of the appreciation or depreciation of non-US currencies like the euro, pound, and yen held in foreign exchange reserves is included in the foreign currency assets, expressed in dollar terms.

But the value of the gold reserves climbed by $340 million to $38.644 billion. 

While the Special Drawing Rights (SDRs) decreased by $63 million to $17.719 billion, the nation's reserve position with the International Monetary Fund rose by $8 million to $4.91 billion during the reporting week.