MUMBAI: The country’s foreign exchange reserves are at a comfortable band and even another 5-8 per cent fall in reserves will not jeopardise the situation, says a DBS report. “In all, despite the recent decline, India’s reserves are in a comfortable range of most metrics. Given lingering external risks, another 5-8 per cent fall in reserves is probable, but is unlikely to jeopardise the adequacy math by much,” it said. As per latest data, forex reserves declined from a record high of $426 billion in April to $403 billion in early-August as the Rupee suffered significant losses since April.
Typically, the RBI intervenes by selling forex reserves to stem the Rupee fall and has been so in the recent past. RBI Governor Dr Urjit Patel’s recent stance on the currency contagion, confirms that the central bank isn’t in favour of excess depreciation and prefers a certain exchange rate level. However, those in the North Block seem to have a varied viewpoint with Niti Aayog’s Rajeev Kumar and government’s former chief economic advisor Dr Arvind Subramanian explaining recently that the Rupee was overvalued against the Dollar and the ongoing correction was a doleful necessity.
The Rupee has been the worst-performing Asian currencies against the Dollar so far this year and breached the 69-mark against the greenback amid global uncertainties, strengthening trade war tensions and rising inflationary pressures. On Monday, Rupee touched an all-time low of 69.62 against the Dollar in morning trade in line with weakening domestic equities and global markets rout. Meanwhile, according to DBS, a challenging global environment has compelled RBI to intervene aggressively this year to contain Rupee depreciation, resulting in significant drawdown in foreign reserves.
As a percentage of GDP, India’s reserves have been smaller than most in the region for a few years now and this is partly the reason why the authorities have had a tendency to build buffers as and when the opportunity arises. According to the report, further accretion to reserves was unlikely this year as foreign capital flows trickle in, and current account pressures resurface. “Nonetheless, the authorities will return to build reserves as and when the macro-environment improves,” it noted.