India’s Forex Reserves Continuous Decline: Falling Rupee, FPI Outflows Worsen Situation

In a third straight week of decline, India’s forex reserves have fallen $5.87 billion in the week ended June 17, amid continued outflow of foreign portfolio investments due to growing concerns over global slowdown. In three weeks till June 17, the reserves have depleted by $10.78 billion to $590.59 billion.

Foreign Investment Outflows

FPIs have been incessantly withdrawing money from Indian equities since October 2021, which is depleting India’s foreign exchange reserves majorly. So far this year, the net outflow by foreign portfolio investors (FPIs) from equities has reached Rs 2.13 lakh crore. During this month till June 24, foreign investors withdrew a net amount of Rs 45,841 crore from equities.

“Given the policy normalisation narrative by the US Fed and other major central banks, coupled with high oil prices and volatile rupee, FPIs are likely to stay away from emerging market assets. FPIs inflow will only resume once there is visibility on the peak of bond yields in the US and an end to Fed rate hikes,” Hitesh Jain, lead analyst (institutional equities) at Yes Securities, said.

Continuous Rupee Decline

The continuous decline in Indian currency due to the FPI outflows has also been adversely affecting the country’s foreign exchange reserves. At the end of February when the Russia-Ukraine war started, the rupee had stood at 73-74 to a dollar. Since then, its continuous fall has forced it to hit all-time low levels multiple times. On Friday, the rupee slipped 1 paisa to close at its record low of 78.33 against the US dollar.

To slow the fall in the rupee, the Reserve Bank of India (RBI) has intervened by selling off dollars in few months. The heavy selling of dollars by the RBI has affected adversely and pulled down India’s forex level.

RBI Deputy Governor Michael Patra has said, “We don’t know where the Rupee will be. Even the US Fed doesn’t know where the dollar will be. But be sure of one thing. We will stand for its (Rupee) stability, and we’re doing it on an ongoing basis even as I speak. We are there in the market. We will not allow disorderly movements in the Rupee. We have no level in our mind, but we will not allow jerky movements. That’s for certain…let it be widely known that we are in the market defending the Rupee against volatility.”

Costlier Imports

Global inflation due to supply chain disruptions due to the Russia-Ukraine war is also affecting India’s forex reserves. Crude oil was of late hovering around a high level or $122 per barrel, palm oil recently had got costlier as Indonesia had banned its imports (now the prices have come down after the lifting of the ban and import duty cuts), and commodity prices also reached their high levels. All these put together were putting pressure on India’s forex reserves as more dollars were required for costlier imports.

CPI inflation in India during April had reached an eight-year high of 7.79 per cent. However, in May, it cooled off to 7.04 per cent. Following the RBI’s second repo rate hike in June and the government’s import duty cut, cooking oil price has also become cheaper by up to Rs 20 for different brands, which may help in lowering the inflation rates further.

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