In the third straight week of decline, India’s forex reserves fell by $5.87 billion in the week ended June 17, amid continued outflow of foreign portfolio investment due to rising concerns over a global slowdown. In the three weeks leading up to June 17, reserves fell by $10.78 billion to $590.59 billion.
foreign investment outflow
FPIs have been continuously withdrawing money from Indian equities since October 2021, leading to major depletion of India’s foreign exchange reserves. The net outflow of foreign portfolio investors (FPIs) from equities so far this year has touched Rs 2.13 lakh crore. During the month till June 24, foreign investors made a net withdrawal of Rs 45,841 crore from equities.
“Given the policy normalization story by the US Fed and other major central banks, coupled with higher oil prices and a volatile rupee, FPIs are likely to stay away from emerging market assets. FPI inflows will resume only when there is visibility on peak bond yields in the US and an end to Fed rate hikes,” said Hitesh Jain, principal analyst (institutional equities) at Yes Securities.
Rupee continues to fall
The continuous fall in the Indian currency due to FPI outflows is also having an adverse effect on the foreign exchange reserves of the country. When the Russo-Ukraine war broke out in late February, the rupee stood at 73-74 a dollar. Since then, its steady decline has forced it to hit all-time lows several times. On Friday, the rupee had closed at a record low of 78.33 against the US dollar.
Reserve Bank to slow down the fall in rupee India (RBI) has intervened by selling dollars in a few months. Heavy dollar selling by RBI has adversely affected and dragged down India’s forex levels.
RBI Deputy Governor Michael Patra has said, ‘We do not know where the rupee will be. Even the US Fed doesn’t know where the dollar will be. But keep one thing in mind. We will stand for its (Rs) stability, and we are doing it on an ongoing basis, as I speak. We are there in the market. We will not allow haphazard fluctuations in the rupee. We have no level in mind, but we will not allow jerky movements. It is of course… It is widely known that we are hedging against the volatility of the rupee in the market.
costly imports
Global inflation due to supply chain disruptions due to the Russo-Ukraine war is also affecting India’s foreign exchange reserves. Crude oil has been hovering around highs or $122 a barrel of late, with palm oil becoming costlier recently as Indonesia imposed restrictions on its imports (now after lifting the ban and cutting import duties). ), and commodity prices also reached their highs. All these combined were putting pressure on India’s foreign exchange reserves as more dollars were required for costly imports.
CPI inflation in India reached an eight-year high of 7.79 per cent during April. However, in May it cooled down to 7.04 percent. Cooking oil prices have also become cheaper by up to Rs 20 for various brands after the RBI’s second repo rate hike in June and the government’s cut in import duty, which may help bring down inflation rates further.
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