Forex kitty shrinks $5 billion to $588 billion

Forex kitty shrinks  billion to 8 billion

MUMBAI: The Reserve Bank of India’s (RBI’s) foreign exchange kitty shrunk by $5 billion to below $590 billion for the week ended June 24. The central bank reported the drop in reserves at a time when it has been actively defending the rupee, which breached the 78 level last month after crude oil prices rose and the current account deficit worsened.
According to data released by the central bank, the RBI’s forex reserves stood at $588 billion as on July 1, down $5 billion from the previous week. The decline was on account of a $4.5-billion drop in foreign currency assets and a $500-million fall in valuation of gold holdings. The decline in foreign currency assets also factors in the drop in value of non-dollar assets vis-a-vis the dollar.
The sharpest fall in forex reserves was for the week ended March 11, which saw the value of reserves drop by over $10 billion. This followed a selloff in the currency markets following Russia’s invasion of Ukraine, which turned global investors risk-averse.
On Friday, the rupee opened flat around the previous day’s close of 79.18 but weakened to close at 79.25 – a decline of 21 paise over the previous weekend’s close.
The domestic currency had dropped to a new low of 79.37 on Tuesday but recovered on Wednesday after the central bank announced a host of measures to attract dollar investments into non-resident accounts, corporate debt and government securities. However, unlike in past crises where a special scheme was announced to help banks hedge against currency and interest risks, this time banks have to devise their own plans.
The measures announced by the central bank and a dip in international crude oil prices have eased some of the pressure on the rupee, which was expected to weaken to 80 levels by some forecasters.
“The recently announced measures will definitely act as a circuit breaker and help on the margin to reduce the depreciation pressure on the rupee, but we don’t think they are going to be a game-changer as far as the rupee is concerned, particularly if the dollar index continues to remain strong and oil prices remain elevated,” said Deutsche Bank research in a report. It added that the recent decline in oil, if sustained, should however help the rupee outlook.
The weakening of the rupee has also raised the prospects of larger rate hikes by the RBI in order to maintain the difference between Fed rates and the repo rate in India. According to Deutsche Bank, the spread between the Fed and RBI rates was 325 basis points (100bps = 1 percentage point) in 2020. “If we assume that this 325bps spread will be maintained in the near future as well — though such spread is currently at a multi-year low — and if we further assume that the Fed Funds rate will rise at least to 3.25%, then we should have a terminal repo rate of 6.50% in this cycle,” the report said.

Indianshri

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