Don't burn a hole

India has spent more than $80 billion this year to save the rupee

Its reserve is now adequate to cover about nine months of imports.
Minimising trouble.
Minimising trouble.
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India’s foreign currency reserves are depleting fast.

Looking to protect the rupee from falling sharply, the Reserve Bank of India (RBI) has deployed $82.8 billion (6.59 lakh crore rupees) from its forex reserves in 2022 so far. In September alone, it sold $10 billion (pdf). The central bank intervened heavily in August as well, traders said.

India’s forex reserves stood at $550.8 billion as of Sept. 09, compared with an all-time high of $642.4 billion last year.

Having registered a series of record lows this year, the rupee has lost nearly 6% against the dollar due to weak risk sentiment amid the Russia-Ukraine war, and global monetary policy tightening. Despite this, the rupee performed better than the rest of its Asian peers.

Maintaining the rupee’s stability

In 2013, the RBI sold a net of $14 billion in the June-September period as the US pulled back monetary support to its economy, denting emerging market currencies like the rupee.

The steady buildup of India’s forex reserves since then has helped RBI withstand global shocks better.

“The starting point of India’s foreign reserves was at a much higher level in this cycle...providing a much thicker cushion to withstand global volatility/shocks,” Radhika Rao, a senior economist at DBS Bank, told Reuters.

However, the RBI must also watch itself.

The reserve could now cover about nine months of imports—the benchmark being three months. Last year, it stood at 16 months.

“Falling forex reserves, persistently-high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations will likely tilt the balance towards a less interventionist FX policy in coming months,” Madhavi Arora, lead economist at Emkay Global Financial Services, said in a note.

Apart from dollar sales, the country’s forex reserve dwindled also due to relative weakness against the greenback in other major currencies like the euro and yen and a lower valuation of dollar-denominated securities held by RBI.