India’s fast-depleting foreign exchange reserves are likely to drop more than was predicted just a month ago by end-2022 as the Reserve Bank of India will continue to shield the rupee from the dollar’s strength, a Reuters poll found.
Even though the RBI has drawn down about $118 billion from its currency reserves from a peak of $642 billion over a year ago, the rupee has fallen nearly 12% during the same period. It touched a lifetime low of 83.29 per dollar on Oct. 20.
India’s forex reserves were forecast to fall to $510 billion from around $525 billion by the end of this year, the Oct. 28-Nov. 1 Reuters poll of 19 economists showed. That was lower than $523 billion in a September poll.
Estimates were in a $520-480 billion range. Reserves of more than $500 billion are generally seen by most economists as adequate for India.
“The RBI governor downplayed the loss in FX reserves in his last monetary policy address, noting valuation losses stemming from a stronger dollar and higher U.S. bond yields…however, that is at best a glass half full picture,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.
A few economists in the poll also cautioned forex reserves could fall more than they are currently predicting over the coming year due to a ballooning current account deficit, which according to a separate poll was expected to end the fiscal year at its widest in a decade.
“That implies further potential depletion in FX reserves that the RBI needs to account for,” Prasanna said.
A drop in foreign currency assets, the largest component of India’s foreign exchange reserves, is the main reason for the overall decline this year.
With the U.S. dollar expected to remain strong in the short- to medium-term that depletion trend was unlikely to reverse anytime soon.
“Till the dollar cycle turns and/or global rates start coming off, further valuation losses can potentially worsen the FX reserves adequacy metrics,” said Samiran Chakraborty, chief economist for India at Citi.
HDFC Bank’s principal economist Sakshi Gupta said the dollar, which has come off a recent peak, could easily reclaim those highs on higher U.S. inflation surprises.
If that happens, “consequently the rupee would then be moving towards 83.50 or even higher, which I think will trigger RBI intervention”, Gupta said.
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