India’s foreign exchange reserves have now fallen to their lowest level since October 2020. FX stocks fell to $553.1 billion in the week ended September 2, down nearly $8 billion from the previous week, according to RBA data.
It was the biggest drawdown in reserves since early July as the RBI sought to avoid the psychological level of 80 for the rupee. The local currency fell to a low of 80.12 in the week ended September 2.
RBI Governor Shakhitikanta Das recently said the central bank will end expectations around a depreciating rupee and intervene to prevent overvaluation to ensure the exchange rate reflects fundamentals.
Experts say that India’s foreign exchange reserves may fall further.
“With RBI’s expected continuation of active FX intervention – to smooth volatility and prevent excessive depreciation in the rupee – FX reserves may decline further from current levels,” said Kaushik Das, Chief Economist for India and South Asia, Deutsche Bank.
ET Monday, the central bank is likely to sell around $13 billion in the stock market in August, the highest monthly foreign exchange intervention in 2022-23.
According to data from the RBI, foreign exchange reserves fell by nearly $21 billion to $553.1 million in the five consecutive weeks between July 29 and September 2.
India’s adjusted forex reserves, including front players, have declined by $17 billion at an ‘unsustainable’ monthly pace over the past five months, Divya Devesh, head of ASEAN and South Asia FX research at Standard Chartered Plc, wrote in a note.
Meg Modi – Commodity and Currency Research Analyst, Prabhudas Lilader Pvt.
The revolving trade deficit, risk
The data shows that in August, India’s merchandise exports reached $61.68 billion, while exports were $33 billion, leaving a deficit of $28.68 billion. India’s current account deficit is widening as imports rise and exports hit flat amid weak global demand, putting further pressure on the domestic and foreign currencies.
According to a research note by Deutsche Bank, India’s trade deficit rose to $300 billion in the current fiscal, taking the current account deficit to $140 billion or 3.9 percent of GDP.
“If the current account deficit really rises to $140 billion, the total BOP (balance of payments) deficit for FY23 could go up to $80 billion, as we are projecting a capital account surplus of around $60 billion,” Das said.
India’s trade deficit widened to $125.22 billion between April-August 2022.
“India’s trade deficit is now running at $30 billion per month, which is a crippling rate. It is not sustainable, so we are suffering in a very big way,” said Swaminathan Ayar, Consulting Editor, ET Now.
“If this kind of thing continues in India for 12-13 months, our foreign exchange reserves will come under severe pressure, and there will be consequences for India as well,” Aiyar said.