Forex prize pool shrinks by $5 billion to $588 billion
According to data released by the central bank, the RBI’s foreign exchange reserves stood at $588 billion as of July 1, down $5 billion from the previous week. The decline was due to a $4.5 billion decline in currency assets and a $500 million decline in the value of gold holdings. The fall in foreign currency assets also takes into account the fall in the value of assets not denominated in dollars against the dollar.
The biggest drop in foreign exchange reserves was for the week ended March 11, which saw the value of reserves fall by more than $10 billion. This followed a sell-off in currency markets following Russia’s invasion of Ukraine, which made global investors risk averse.
On Friday, the rupiah opened flat around the previous day’s close at 79.18 but weakened to close at 79.25 – down 21 paise from the previous weekend’s close.
The national currency had fallen to a new low of 79.37 on Tuesday but rallied on Wednesday after the central bank announced a series of measures to attract dollar investments in non-resident accounts, corporate debt and public securities. However, unlike past crises where a special regime was announced to help banks hedge against currency and interest rate risks, this time banks need to design their own plans.
The measures announced by the central bank and a drop in international crude oil prices eased some of the pressure on the rupee, which was expected to weaken to 80 levels according to some forecasters.
“The recently announced measures will certainly act as a circuit breaker and help the margin to reduce the depreciation pressure on the rupee, but we do not believe they will be a game-changer for the rupee, particularly if the ‘dollar index continues to remain strong and oil prices remain elevated,’ Deutsche Bank research said in a report. It added that the recent drop in oil, if prolonged, should however improve the outlook rupee.
The weaker rupiah also raised the prospect of larger rate hikes by the RBI to maintain the spread between Fed rates and India’s repo rate. According to Deutsche Bank, the spread between the Fed and RBI rates was 325 basis points (100 basis points = 1 percentage point) in 2020. “If we assume that this 325 basis point spread will be also maintained for the near future – although such a spread is currently at a multi-year low – and if we further assume that the Fed Funds rate will rise by at least 3.25%, we should have a terminal repo rate by 6.50% in this cycle,” the report said.