Since the crisis in Ukraine, India's foreign exchange reserves have dropped by more than $80 billion, with the most recent week seeing a drop of more than $2 billion as a result of the Reserve Bank of India selling dollars in an effort to prevent the rupee from falling below the 80-to-the-dollar mark.
According to the most recent weekly statistics released by the RBI, the amount of foreign exchange reserves decreased by $2.234 billion to $550.871 billion in the week ending September 9 from $553.105 billion the week before, the lowest level in nearly two years.
Since Russia invaded Ukraine in late February, India's import cover has decreased for six weeks in a row and 23 out of 29 weeks. This trend is a result of the RBI's ongoing withdrawals from reserves to combat a rise in the US dollar brought on by capital inflows into dollar-denominated assets.
The country's foreign exchange reserves are down more than $90 billion from their peak in October of last year.
Even while foreign money has been flowing steadily into the country's markets, the growing current account deficit has not been able to stop the decline in import cover.
The RBI intervened to control the currency's erratic fluctuations after the rupee fell sharply this year from around 74 to a weak record low of over 80 against the dollar.
The RBI's most recent monthly bulletin, which was published on Friday and showed the central bank sold a net $19.05 billion in foreign exchange in July, provided some support for that.
Rupee market movements indicate that this pattern persisted throughout August and current month.
The dollar is still rising to new heights versus the majority of global currencies, thus the focus for a while will probably remain the country's declining foreign exchange reserves.
The dollar reached a fresh record high on greater bets on the Federal Reserve raising rates, while the World Bank and the International Monetary Fund both issued warnings about slowing economic growth against a backdrop of rising inflation as the rupee saw its worst week in five on Friday.
Market participants were wary that the rupee had not been allowed to drop past 80 against the dollar and considered that level as one to safeguard, a foreign exchange trader told Reuters.
Following a global sell-off due to imminent recession fears from the broadest and most aggressive policy tightening in decades, Indian equities plunged on Friday, wiping out gains for the week and extending losses for the third consecutive session.
That implies that the RBI will need to draw down more reserves in order to safeguard the rupee from excessive swings.
Due to the strong dollar and risk aversion in international markets, we anticipate that the rupee will trade negatively. Anuj Choudhary, a research analyst at Sharekhan by BNP Paribas, told PTI that after IMF spokesman Gerry Rice expressed fears about a further downturn in the global economy and stated that some nations are anticipated to enter recession in 2023, global markets fell.
Even if the country's foreign exchange reserves have decreased significantly this year, it has nevertheless managed to do better than its rivals in developing markets, where the import cover has reached crisis levels.
According to the most recent data from the RBI, the largest component of India's foreign exchange reserves, its foreign currency assets (FCA), decreased by $2.519 billion to $489.598 billion during the week ended September 9 compared to a decrease of $6.527 billion to $492.117 billion the week prior to the reporting period.
The foreign currency assets, presented in dollar terms, include the value of the appreciation or depreciation of non-US currencies held in foreign exchange reserves, such as the euro, pound, and yen.
The gold reserves, however, increased in value by $340 million to $38.644 billion.
The Special Drawing Rights (SDRs) fell by $63 million to $17.719 billion during the reporting week, but the country's reserve position with the IMF increased by $8 million to $4.91 billion.