NEW DELHI: India’s foreign exchange (forex) reserve has fallen by another $7.9 billion in the week ending September 2, 2022, to $553 billion. The country’s forex reserve has shrunk by almost $90 billion from the peak of $642 billion in November 2021.
Forex reserves at current level can pay for 9 months of imports. India’s monthly import bill is around $63 billion.
The continuous drop in the country’s forex reserve has been largely attributed to the central bank’s efforts to support the rupee, which has fallen 8% over the past one year.
“Since June end forex assets are down around $32 billion. We estimate around $8-10 billion could be on account of valuation impact and rest due to sales in the spot market,” says Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities.
The forex reserves comprise 90% of foreign currency assets and the rest is gold and special drawing rights (SDRs) with the IMF.
As per Banerjee, the drop in reserves during August was largely due to the plunge in value of major reserve currencies -- Euro, Pound sterling and Swiss Franc etc -- against the US dollar.
As per economist Lekha Chakraborty, the hot money component of forex is volatile because of interest rate differentials. “With the Fed Reserve making a series of hikes in interest rates, emerging economies including India are experiencing capital flight and this is affecting our forex reserves,” she added.
She thinks interest rate defense by the RBI is a significant measure to prevent capital flight, and RBI is doing its job.
Economists are not pressing the panic button yet, though. “We have adequate reserves to tide over the current situation and I do not see the dent as significant enough,” says Kunal Kumar Kundu, India economist at Societe Generale Corporate and Investment Bank.