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Rupee Hitting an All-Time Low Suggesting Forex Reserve Erosion

Rupee hitting an all-time low suggesting forex reserve erosion

Highlights:

  • INR (Indian Rupee) weakened to an all-time low, hinting that India’s forex reserves, which has already dropped below $600 billion to erode further.
  • Reserve Bank of India is said to have sold dollars in the market and offshore non-deliverables forwards (NDF) markets to prevent the further erosion of the forex reserves.

On Monday, the rupee weakened to an all-time low, trading beyond 77.40% against the dollar. This further reiterates that India’s foreign (forex or FX) exchange reserves, which fell below $600 billion their lowest in the year, will likely erode further. As per the latest information from the Reserve Bank of India on Friday, April 29, the country’s forex reserves fell by $2.695 billion to $597.728 billion, a straight eighth week of declines.

The weakening position of INR in the global currency market

Moreover, RBI’s weekly statistical supplement data shows that India’s forex reserves are down by 5.4%, nearly $34 billion, since the February 25 week, largely from the time of Russian invasion of Ukraine. This becomes problematic since it took an entire year for India to build its FX to $630 billion market. And the global energy crisis from Ukraine has severely hurt Indian currency along with its import cover in just two months. The downfall below $600 billion was first witnessed around May 2021 when the country was battling its worst wave of the pandemic.

This fall of the FX reserves for eight consecutive weeks shows how fragile the country’s economic condition is at the moment. Experts consider it to be an ominous sign for country’s import cover during such uncertain times. This rupee slump is further driven by the surge in the price of dollar after the aggressive US Federal Reserve policies to combat runway inflation and prevent harsh results due to the Ukrainian supply disruptions. Of course, the dollar reign is expected to continue for the coming year.

RBI focusses on the Forex reserves

The central bank is said to have sold dollars in the futures market and the offshore non-deliverable forwards (NDF) markets to prevent a drawdown for now on its foreign exchange reserves that are just shy of $600 billion currently. And the RBI will continue to intervene in the foreign exchange markets to protect the further sliding of the rupee that has already a record all-time low. Yet, the persistent capital outflows has not helped rupee, which is also suffering heavily due to India’s import war chest. This combined with foreign investors pulling out money over $6400 crore from the Indian equity market in May’s first four trading sessions will have severe implications for the Indian economic market.

A report from the Wall Street brokerage, Bank of American Securities India shows that foreign funds’ ownership in domestic equities fell to pre-COVID-19 lows and hit a multi-year low of 19.5 per cent in March this year NSE500 companies.

While the currency weakening benefits exports, this will not hold good for the current high-and-low inflation condition global-wide.

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