Forex reserves spiral down by $8 billion on FPI exits, US Fed rate hike worries

Forex reserves have fallen by $13 billion in the two weeks ended June 8. Foreign investors have taken out Rs 2.24 lakh crore from the equity market and Rs 15,749 crore from debt since January this year, putting pressure on the rupee and the forex kitty.

The RBI is going slow in artificially propping up the dollar by selling dollars from its kitty, allowing the rupee to depreciate and adjust it to other currencies so that exports can become competitive, sources said. However, as the value of the rupee declined in the last a few weeks to 79.88 against the dollar by Friday, the RBI reportedly prevented the rupee from falling below 80 by selling dollars in the last two days.

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.

According to Aditi Gupta, economist, Bank of Baroda (BoB), global currencies depreciated against the dollar as a hotter than expected US inflation report drove the currency higher. Expectations that the Fed might hike its policy rate by 100 bps next week after the inflation report along with increasing risks of a global recession are underpinning the dollar strength, she said.

The rapid depreciation in the rupee seen presently is driven to a large extent by adverse global factors, particularly a strengthening USD and FPI outflows. “Apart from this, India’s external position which remained strong in the last two years, attributable to the pandemic, has deteriorated quite a bit. Trade deficit is at a record-high and this coupled with persistent FPI outflows has put pressure on the balance of payments which is also weighing on the rupee,” Gupta said.

To counter the growing CAD, the RBI announced a slew of measures to strengthen the capital account focussing on debt inflows, ECBs and NRI deposits last week. However, these might not be enough to counter the burgeoning CAD, BoB said.

On the current account side, the government announced a hike in gold import duty to curb non-discretionary imports.

Movements in the foreign currency assets — the major component of the forex kitty — occur mainly on account of purchase and sale of foreign exchange by the Reserve Bank, income arising out of the deployment of the forex reserves, external aid receipts of the Central government and changes on account of revaluation of the assets.

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The value of gold held by the central bank also declined by $1.23 billion to $39.18 billion during the week ended July 8. As of end-March 2022, the RBI held 760.42 metric tonnes of gold (including gold deposits of 11.08 metric tonnes). While 453.52 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank for International Settlements (BIS), 295.82 metric tonnes of gold is held domestically.

In value terms, the share of gold in the total forex reserves increased from about 5.88 per cent as at end-September 2021 to about 7.01 per cent as at end-March 2022, the RBI said.