What has happened?
- India’s forex reserves slumped to the lowest in over two years, marking the third straight week of decline as the Reserve Bank of India, true to its word,
- Intervened to keep the rupee from weakening past 80 per dollar during a week when the dollar surged to over two-decade highs.
- The RBI’s weekly statistical data showed the country’s foreign exchange reserves fell by $6.687 billion to $564.053 billion in the week ending August 19, Marking its lowest in over two years and the third week of decline in a row.
- The quantum of fall in the latest week, $6.687 billion, was the largest since mid-July.
Down from $640 billion
- Barring the increase in the last week of July, which seems like a statistical blip, India’s forex war chest has declined every single week since early July.
- It has fallen for 20 of the 26 weeks since Russia invaded Ukraine in late February.
- That slump in forex reserves by a touch over $67 billion since the Ukraine crisis and nearly $80 billion from its all-time highs last year echoes the slide in the rupee from about 74 per dollar to near 80, a level which analysts say the RBI has defended ferociously.
- The fate of the Indian currency has been driven by the rampant dollar in international markets, driven by an exodus of capital into dollar-denominated assets and at the cost of almost every other major currency in the world.
- The RBI has intervened and has openly said it would do whatever it takes to defend the rupee from wild volatility.
Is it a worry for Indian economy?
- Still, India’s forex reserves are the fourth largest globally, according to RBI governor Shaktikanta Das after the latest rate-setting meeting when the central bank hiked rates for the third consecutive time.
- A report showed that India has built up buffers against cyclical difficulties and has ample foreign exchange reserves to withstand pressure on credit worthiness, S&P Global Ratings said on Thursday.
- The country has a strong external balance sheet and limited external debt, making debt servicing not so expensive.
- A separate Reuters report quoting government and industry sources showed that,
- India might offer incentives to exporters settling deals in rupees to promote the currency’s attractiveness and raise the sales of commodities to Russia, which have decreased due to western sanctions.
- On an absolute basis, the 2008-09 global financial crisis led to a drawdown of $70 billion in the reserves,
- Which came down to $17 billion during the COVID-19 period and stood at $56 billion as of July 29 this year due to the Ukraine invasion-related impact.
- But for now, the current crisis is far from over and may mean a further erosion in the country’s forex war chest.
Q) Foreign exchange reserve cannot include which among the following?
- None of the above