With the rupee remaining under pressure, India’s foreign exchange reserves fell by another $ 7.54 billion to $ 572.71 billion during the week ended July 15 amid appreciation of the dollar and capital outflows from India triggered by the rise in inflation and rate hikes by the US.
With this, forex reserves have plummeted by nearly $ 70 billion from the record high of $ 642.45 billion registered on September 3, 2021. A 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 have also played a part in the decline in foreign exchange reserves.
Forex reserves have fallen by $ 20 billion in the three weeks ended July 15. Foreign investors have taken out Rs 2.27 lakh crore from the capital market since January this year, putting pressure on the rupee and the forex kitty.
The RBI said it has been selling dollars from the forex kitty to defend the rupee. “In recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity,” RBI Governor Shaktikanta Das said on Friday, admitting that the RBI was selling dollars to defend the rupee.
After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong, Das said, on RBI intervention to prop up the rupee.
The US currency has been gaining ground even as the US annual consumer prices jumped by 9.1 per cent in June, the highest in four decades, exceeding expectations of an 8.8 per cent rise. 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.
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Analysts said there is a clear change in FPI action in the market. “The relentless selling by FPIs which started from October 2021 appears to be over. They have significantly slowed down selling in July and have even turned buyers for 5 days in July, particularly during the last few days when they continuously bought,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
In sharp contrast to the Rs 50,145 crore selling in June, the selling in July has come down sharply to a mere Rs 3,888 crore in July so far. The dollar index which had moved above 109 is now down to 107.21. This is one of the factors that have contributed to the change in the FPI strategy, he said.