Forex Reserves Slump By $3 Billion As RBI Defends Rupee From Record Lows

Forex reserves slumped to over a two-year low, falling by 3 billion in the last week of August as the Reserve Bank of India intervened to defend the rupee after the currency hit a new record weak low against a rampant and two-decade high dollar.

The country's import cover fell by $3 billion to $561.046 billion in the week ending August 26, compared to $564.053 billion in the week before that, according to the RBI's latest weekly supplementary statistical data.

That marks the fourth straight week of decline in forex reserves and down for 21 out of 27 weeks since Russia invaded Ukraine, the biggest drawdown since the financial crisis.

India's forex cover is down over $70 billion since the war at the edge of Europe began in late February and has fallen more than $80 billion from its peak in late October last year.

The widening trade deficit has not helped the country's forex reserves.

The country's trade deficit more than doubled to $28.68 billion due to increased crude oil imports and a fall in exports for the first time in over 20 months, with foreign purchases of Indian goods and services contracting 1.15 per cent to $33 billion in August.

The fall in forex reserves has coincided with the rupee's dramatic and steep decline this year from about 74 before the Ukraine war to near 80 per dollar currently.

The rupee breached the key psychological level of 80 per dollar again in late August to hit a new record low of 80.15 against the dollar but has since recovered with RBI's support.

While the RBI has previously said it does not target a particular level and will intervene only to limit the extreme volatility in the currency, analysts said that level is RBI's pain threshold.

The dollar's sustained strength will ensure the rupee breaches the 80 levels, even though the RBI has tried to protect it, said Ritesh Agarwal, Head of Treasury at CTBC Bank, predicting that the rupee could be at 80.5 by the end of September.

On Friday, the central bank reaffirmed that inflation had peaked and might reach 5 per cent in the second quarter of next year, but that didn't bring much hope to the markets and was overshadowed by worries about the Fed's action at the upcoming September meeting, which boosted the dollar to a two-decade high.

The rampant greenback has pinned down almost every currency as the Fed has embarked on an aggressive monetary policy path. With no signs of slowing down coupled with global economic recession, fears have pushed investor exodus into dollar-denominated assets.

India's inflation issues are driven by supply-side challenges that have yet to be resolved, said CTBC Bank's Mr Agarwal, adding that China locking down its cities and the war in Ukraine will keep adding to those.

But last week, while the rupee declined against the dollar, it closed up 0.1 per cent for the week, its first gain in three.

Still, the country's forex war chest is at risk of further drawdowns as the RBI has made clear it will step in to limit wild gyrations in the rupee.

Meanwhile, India has overtaken the UK to become the world's fifth-largest economy and is now behind only the US, China, Japan and Germany, according to IMF projections.

A decade ago , India was ranked 11th among the large economies while the UK was at the fifth position.

Experts now expect the country to become the fifth largest economy by 2030, a reflection of the shift up in the power scale as India is the fastest growing economy.