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Forex reserves lowest since Oct 2020; likely to stay under pressure in near term

India’s foreign exchange (forex) reserves dropped to their lowest level since October 2020, to $564 billion due to a sharp decline in foreign currency assets. All components under forex reserves witnessed a drop in the week ending August 19, 2022. Gold reserves dipped as well after two consecutive weekly rises. The country’s forex reserves continue to be under pressure amidst the biggest buying from overseas investors in the Indian market. Forex reserves are likely to be vulnerable in the near term as the US dollar index is moving towards mid-July highs.

As per RBI’s latest weekly bulletin, India’s forex reserves declined by $6.687 billion to $564.053 billion in the week ending August 19, 2022, compared to the previous week. In the week ending August 12, the reserves contracted by $2.238 billion.

During the week under review, foreign currency assets (FCA) extended their drop further by $5.779 billion to $501.216 billion. In the week ending August 12, FCA slipped by $2.652 billion. FCA is the major component for forex reserves.

Meanwhile, in the week ending August 19, gold reserves plunged by $704 million to $39.914 billion, whereas SDRs tumbled by $146 million to $17.987 billion compared to the previous week. Reserve position in the IMF slides down by $439 million to $4.936 billion.

Ritika Chhabra – Economic and Quant Analyst at Prabhudas Lilladher said, “India’s FX reserves dipped to $564 billion as of August 19th, lowest since October 2020. The main reason behind this fall is a dip in foreign currency assets which the RBI has been using in forex market to cushion the fall in rupee.”

Chhabra added, “Since the start of this year, the geopolitical uncertainties and back-to-back rate hikes by the Fed have led to weakening of emerging market currencies including INR.”

Last week, on Friday, the Indian rupee appreciated to 79.84 against the American currency, on the back of positive sentiment in domestic equities and a weaker dollar. However, the local unit’s gains were limited as higher crude oil prices played a spoilsport.

Whereas foreign portfolio investors (FPIs) have invested 55,031 crore in the Indian market, from August 1 to August 26. In the equity market, foreign funds inflow stood at 49,254 crore. This would be the biggest monthly buying by FPIs so far in the year.

Going forward, Chhabra said, “The forex reserves are likely to stay under pressure in the near term as DXY is back to its mid-July highs and oil prices are expected to stay elevated.”

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