India's foreign exchange reserves fell in the latest week as the Reserve Bank of India intervened in the currency market to limit the rupee's fall aga
India’s foreign exchange reserves fell in the latest week as the Reserve Bank of India intervened in the currency market to limit the rupee’s fall against a strengthening dollar.
COMMERCIAL BREAK
SCROLL TO CONTINUE READING
This comes after the country’s import cover hit record highs for two weeks before the latest week.
The RBI’s weekly statistical supplement data showed that the forex reserves fell to around $653 billion in the week ending June 14, down from a record high of nearly $656 billion the previous week.
Foreign exchange reserves help a country pay for imports, and the war chest is used for external debt payments.
Usually, currency moves weigh heavily on the import cover, and the story is no different in the latest week.
Dollar strength weighing on rupee
The dollar has strengthened on bets the US Federal Reserve will take longer to pivot to policy easing even as other major central banks have brought their knives out already.
According to the latest Federal Open Market Committee’s (FOMC) dot plot projections, the central bank will cut rates just once by the end of this year, compared to three pencilled in by US policymakers themselves as recently as March.
While the RBI is also not likely to cut rates anytime soon, and the last leg of the inflation fight is likely to take longer than previously thought, the Fed’s outlook drives global currencies.
With the monetary policy divergence out of the scenario, the rupee’s moves are not driven solely by the other side of the exchange story.
Foreign inflows remain a question mark
While Indian stocks have risen to repeat record highs this month, foreign inflows have been subdued, and demand for dollars by importers and large institutions has jumped.
Broadly, foreign investors have stayed on the sidelines even as the inflows into Indian bonds have jumped in recent weeks.
Traders say the RBI has intervened in the forex market to prevent extreme moves in the rupee and limit its fall.
“The Indian rupee started experiencing pressure due to the recent election results, which led to a coalition government, dampening investor sentiments,” said Amit Pabari, Managing Director and founder of CR Forex.
“Moreover, the Indian rupee has been under pressure due to increased demand from oil importers, a factor that has been further exacerbated by the hawkish Fed policy and stronger-than-expected economic data from the US, keeping the Indian rupee on the weaker side last week,” added Pabari.
Still, India’s import war chest has swelled this year and is near record highs, giving the central bank more buffer to keep the rupee in a range, albeit near record lows.
This week, the Indian currency hit its weakest level against the dollar, with dollar demand jumping and a rise in global oil prices weighing on the rupee.
India vs its neighbours’ FX reserves
Despite the nearly $3 billion fall in India’s FX reserves in the latest week, the country is better off than its neighbours, who have, at best, a few months of import cover as foreign currency reserves.
The weekly changes in reserves matter little to financial markets unless there is a significant change.
With India’s economic growth on a solid path and one of the fastest rates in the world, investors will likely see this as a blip rather than a trend.
The outlook for the country’s reserves remains broadly robust even as the rupee hit its weakest rate against the dollar this week.
“The major trigger for the rupee’s fall towards its all-time low was a major outflow of $1.7 billion from Vodafone’s Indus Tower stake sale, which exerted considerable pressure on the currency, especially in the absence of bids for the dollar,” said Pabari.
“Additionally, dollar demand from oil-importing companies has recently surged, resulting in a rise in oil prices, which have risen by nearly 10.5% in the past two weeks. The rupee faced some strain, which combined to make it mark its all-time low,” added CR Forex’s Managing Director.
Traders expect the RBI to dip into the forex reserves to stem the fall in the rupee.
However, they do not predict any significant erosion of the country’s import war chest.
Outlook for the rupee ahead of the budget
The rupee is broadly expected to remain in a tight range, albeit near record low levels as investors eye several announcements from the coalition government’s new budget.
Pabari from CR Forex said, “Factors including economic conditions, investor sentiment, and global market trends can influence the rupee’s outlook ahead of the budget announcement.”
“It’s important to note that the performance of the rupee post-budget under coalition governments has been far from predictable. The need to appease multiple political partners often results in cautious budgets, which can hinder the implementation of bold reforms. In such scenarios, markets tend to respond more favourably to budgets that demonstrate fiscal prudence and clear reform measures,” he added.
www.wionews.com