India’s foreign exchange reserves near 2-year low

India’s foreign exchange reserves fell to their lowest level since October 2020 as the Reserve Bank of India (RBI) intervened proactively to help the local currency amid a surging dollar, analysts said on Monday.

India’s foreign exchange reserves fell to $553.1 billion in the week ended September 2, down nearly $8 billion from the previous week, according to data released Friday by the RBI.

This is the largest drop in reserves since early July.

During the week ended September 2, the rupiah fell to a record low of 80.12 against the dollar on the prospect of aggressive monetary tightening by the US Federal Reserve.

Last week, RBI Governor Shaktikanta Das said the central bank would anchor expectations around rupee depreciation and intervene to prevent an overshoot, ensuring the exchange rate reflects fundamentals.

Vivek Kumar, an economist at QuantEco Research, pointed out that the decline in reserves was not entirely due to RBI’s one-off intervention.

Mark-to-market valuation of exchange rates and the expiry of futures contracts would likely have contributed to the fall, Kumar said.

The RBI has steadily dipped into reserves to protect the rupee from volatility fueled by US Fed rate hikes and high commodity prices.

The dollar index and short-term Treasury yields hit multi-year highs.

“RBI might as well hang on to the current strategy for a bit longer and hope that the decline in commodity prices continues and the dollar finds no further reason to strengthen,” Kumar said.