By Pallavi Nahata
India’s foreign exchange reserves saw the steepest weekly fall in nearly seven years as the central bank stepped in to slow the fall in the rupee.
Forex reserves fell by $5.14 billion during the week ended October 12, shows data released by the Reserve Bank of India. This took reserves down to $394.46 billion compared to the peak of $426 billion in April. The last time reserves fell by more than $5 billion in a week was in November 2011.
The fall in forex reserves came soon after the Reserve Bank of India’s scheduled monetary policy meet. Ahead of the meet, many had expected the monetary policy committee to raise rates as a way to defend the currency. The committee, however, reiterated that its mandate was purely one of inflation targeting. As such, any response to the currency weakness would only be considered via the lens of its impact on inflation.
This led to sudden weakness in the currency.
On October 5, the day of the policy meet, the Rupee weakened to 74.11 against the U.S. dollar in intraday trade compared to its previous close of 73.50. The rupee recovered and closed at 73.88 on perceived intervention from the Reserve Bank of India. The rupee continued to weaken over the next week and hit a low of 74.42 against the U.S. dollar on October 11. Since then the rupee has recovered due to a fall in oil prices. It closed at 73.32 on Friday. The rupee is down 13 percent so far this year.
The RBI’s relative comfort with a weaker rupee led to fresh selling in the forex markets. Analysts had also marked down their rupee forecasts following the central bank’s meet.
HSBC Research revised its forecast for the rupee for 2018 and 2019. The rupee is seen at 76 against the U.S. dollar by the end of 2018 compared with a forecast of 73 earlier. The forecast for end of 2019 has been marked down to 79 against 74 earlier. The research house cited a “shrinking yield advantage” and the RBI’s apparent willingness to accept greater rupee weakness as reasons for the change in forecast.
With the RBI showing its unwillingness to use interest rates to defend the currency, the burden of any support needed will fall on the reserves and could lead to quicker depletion. At current levels, reserves are seen as adequate to cover more than 10 months of imports.
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