Forex Reserves Dip For 4th Straight Week, But That Trend May Reverse

Foreign reserves fall by more than $1 billion for fourth straight week of declines. India’s foreign exchange reserves fell by more than $1 billion in the last reported week, the fourth week in a row after the rupee fell to an all-time low, breaking 80 against the dollar for the first time.

However, this downtrend could reverse if the rupee moves over the past week and foreign capital inflows should be considered. The latest weekly additional data from the Reserve Bank of India showed that India’s foreign exchange reserves fell by $1.152 billion to $571.56 billion in the week ended July 22, compared with $572.712 billion in the week ended July 15.

This marks the fourth straight month of decline in India’s import coverage and marks the 20th week of decline since Russia invaded Ukraine, which saw foreign reserves fall by nearly $30 billion and more than $70 billion from a peak of 642.45 dollars falling in October.

The downward trend in the nation’s currency basket has been linked to foreign capital outflows as part of the global trend towards dollar-denominated assets, driven by rising global inflation and larger interest rate hikes by the US Federal Reserve.

Overseas portfolios and institutional investors were net sellers of Indian assets for several months, pushing the rupee to an all-time low. In July, the currency jumped above 80 against the dollar for the first time, and the rupee has fallen more than 7 percent since the start of the year, when it traded at 74 against the greenback.

The trend can be reversed

On Friday, the rupee posted its biggest one-day gain in almost a year, helped by the dollar’s sharp decline. The Indian rupee hit a session high of 79.17 against the dollar, its highest since July 7.

“The recent downward correction in commodity prices is giving the INR some recovery, although it is likely temporary,” wrote Kunal Kundu, India economist at Societe Generale, in a note released on Thursday.

“The growing market belief that a US recession is imminent and the resulting demand for safe havens for the dollar are the main near-term risks for the rupee. RBI FX intervention should continue to curb the volatility of the rupee,” he added.

Thanks to new capital inflows and a weak greenback in global markets, the rupee rose 45 paise, posting its biggest one-day gain since October 20, 2021.

“The rupee posted its biggest one-day gain since October 20 as the dollar weakened and stocks rose. Domestic equities and the rupee found support from month-end rebalancing as well as dollar selling by exporters,” Dilip Parmar, research analyst at HDFC Securities, told PTI.

India’s central bank has zero tolerance for unexpected rupee fluctuations, according to RBI chief Shakktanta Das. It will constantly interact with the forex market to ensure the rupee settles at the right level.

The dollar remained near a six-week low against the yen amid a sharp fall in government bond yields. Almost all Asian currencies rose against the US dollar.

Foreign investors ended July as net buyers of Indian equities, the first time in 10 months. July was the first month since October with a net inflow of foreign funds.

The rupee strengthened against the dollar on massive debt repayments following a contraction in US GDP, Aninda Banerjee, vice president, currency and interest rate derivatives at Kotak Securities Ltd., told PTI.

There may be more liquidation next week but we expect the pair to find strong support near the 78.80/90 spot level. The range could be between 78.80 and 79.65 in the spot market, Banerjee said.

Foreign financial inflows will be a key factor in determining the fortunes of the rupee in the coming months. Foreign investors have been net sellers of more than $30 billion worth of Indian shares so far in 2022.

Traders will focus on the Reserve Bank of India’s review of monetary policy next week.

“With the Federal Reserve holding on to 75 basis point gains and fears of a global recession still looming, the RBI could announce a modest 25 to 35 basis point hike in repo rates next week,” said a senior trader at a private bank.

Barclays said they expect the RBI’s monetary policy committee to vote unanimously next week to raise interest rates by 35 basis points.

“While inflation is likely to remain high in the near term, we believe the MPC may recognize that price pressures have peaked and will watch for a favorable pullback by lowering, albeit slightly, its inflation forecast.” they added.

For the sixth month in a row, India’s retail inflation remained consistently above the 7 percent threshold and well above the limit the central bank allowed in June. However, the last few months have shown a downward trend.