The country’s foreign exchange reserves fell by $9.64 billion to $622.275 billion in the week ended March 11, 2022, as the rupee depreciated against the US dollar in a amid rising crude oil prices and capital outflows due to sustained selling by foreign portfolio investors (REITs) . It’s the biggest drop in nearly two years after foreign exchange, or forex, reserves plunged $11.98 billion in the week ended March 20, 2020, when the Covid pandemic took hold. hit India and REITs withdrew funds.
Why the decline
When the rupiah fell below the 77 level after the Russian-Ukrainian war escalated and crude oil prices spiked, the Reserve Bank of India (RBI) sold dollars to prevent a fall in the value of the rupee. The RBI intervention – dollar sales via PSU banks – began when the rupiah broke through the 76 level and headed towards 77 against the dollar.
The RBI sold $5.135 billion to the banks on March 8 and simultaneously agreed to buy back the dollars at the end of the swap settlement period. When the central bank sells dollars, it sucks up an equivalent amount in rupees, thereby reducing rupee liquidity in the system. The influx of dollars in the market strengthened the rupiah which reached the level of 77 against the dollar on March 8th. On March 17, the rupee jumped 41 paise to close at 75.80/81 against the dollar.
Pressure on the rupee
Putting heavy pressure on the rupee, foreign investors have withdrawn Rs 41,617 crore so far in March. The outflow came after withdrawals of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, REITs have withdrawn Rs 2,25,649 crore (excluding REIT investments in IPOs) since October 1, 2021, mainly anticipating an interest rate hike by the US Federal Reserve.
Additionally, Brent prices soared to a nearly 14-year high of $140 as the war in Ukraine escalated. As India imports nearly 80% of its domestic oil requirements, high crude prices would have led to a sharp increase in dollar requirements.
Sharp drop in FCA
The main components of foreign exchange reserves are foreign currency assets (FCA), gold assets and IMF SDRs (special drawing rights). The RBI sold dollars from its FCA kitty – kept in global central banks, foreign banks and foreign securities – to bolster the rupiah.
According to central bank data, FCA plunged $11.108 billion to $554.359 billion in the week ended March 11. The FCA includes the effect of the appreciation or depreciation of the dollar and non-US units such as the euro, the pound and the yen held in foreign exchange reserves.
However, with the surge in gold prices in the context of the Russian-Ukrainian war, the value of gold reserves increased by $1.522 billion to $43.842 billion during the reference week.
For the week ended, the country’s foreign exchange reserves decreased by $9.646 billion to $622.275 billion. Reserves had increased by $394 million to $631.92 billion in the prior week ended March 4. They reached a lifetime high of $642.453 billion during the week ended September 3, 2021.
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