The Country’s foreign exchange reserves fell by $9.64 billion to $622.275 billion during the week ended March 11, 2022, as the rupee depreciated against the US dollar amid the rise in crude oil prices and capital outflows due to sustained selling by foreign portfolio investors (FPIs) . This is the biggest fall in nearly two years after the foreign exchange, or forex, reserves plunged by $11.98 billion during the week ended March 20, 2020, when the Covid pandemic hit India and FPIs pulled out funds.
Why the decline
When the rupee fell below the 77 level after the Russia-Ukraine war intensified and crude oil prices flared up, the Reserve Bank of India (RBI) sold dollars to prevent a slide in the rupee value. The RBI intervention — dollar sales through PSU banks — started when the rupee crossed the 76 level and headed towards 77 against the dollar.
The RBI sold $5.135 billion to banks on March 8 and simultaneously agreed to buy back the dollars at the end of the swap settlement period. When the central bank sells dollars, it sucks out an equivalent amount in rupees, thus reducing the rupee liquidity in the system. Dollar inflow into the market strengthened the rupee which hit the 77 level against the dollar on March 8. On March 17, the rupee spurted by 41 paise to close at 75.80/81 against the dollar.
Pressure on rupee
Putting severe pressure on the rupee, foreign investors have withdrawn Rs 41,617 crore in March so far. This outflow has come after withdrawals of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, FPIs have pulled out Rs 2,25,649 crore (excluding FPI investments in IPOs) since October 1, 2021, mainly anticipating an interest rate hike by the US Federal Reserve.
Moreover, Brent crude prices soared to a near 14-year high of $140 as the Ukraine war intensified. As India imports nearly 80 per cent of its domestic oil requirements, high crude prices would have led to a steep rise in dollar requirement.
Sharp fall in FCA
The main components of forex reserves are foreign currency assets (FCA), gold holdings and SDRs (special drawing rights) of the IMF. The RBI sold dollars from its FCA kitty — kept in global central banks, foreign banks and foreign securities — to strengthen the rupee.
According to data from the central bank, FCA plunged by $11.108 billion to $554.359 billion in the week ended March 11. The FCA include the effect of appreciation or depreciation of the dollar and non-US units like the euro, pound and yen held in the foreign exchange reserves.
However, with gold prices shooting up in the backdrop of the Russia-Ukraine war, the value of gold reserves increased by $1.522 billion to $43.842 billion in the reporting week.
For the week ended, the country’s foreign exchange reserves declined by $9.646 billion to $622.275 billion. The reserves had increased by $394 million to $631.92 billion during the previous week ended March 4. They touched a lifetime high of $642.453 billion during the week ended September 3, 2021.