Indian Rupee’s Falling Spree and Depreciating Foreign Reserves; What’s the Verdict?

The Indian Rupee finds itself in a downward spiral against a surging dollar even as global markets face rough seas.

The value of the rupee has maintained its dip against the rising dollar as the dollar persisted in bolstering against major currencies of the world, even as the fear of risk and global recession looms on the horizon. Also contributing to the rupee’s downward spiral is the rising oil prices.

To add to the falling rupee, the Indian domestic equity market has not shown any green sparks as it continues to display its almost flat journey.

According to Dinesh Khara, Chairman – of the State Bank of India, the weakening of the India Rupee is basically because the dollar has regained its momentum; however, the Indian rupee, as compared to currencies of other emerging markets, is holding well.

He also said that the Indian currency is not as volatile as the rest of the global currencies and better than the Indian currency was that of Indonesia and Brazil. The Indonesian market is essentially a commodity market.

However, any further depreciation of the rupee would be a cause for concern since India has significant imports.

The Reserve Bank of India, RBI, has intervened to check the fall of the Indian rupee and to keep in check its volatility.

The rupee is expected to trade in a range of 81.80 to 82.80 against the US dollar in the short term.

Market Sentiments Turn Sour

The World Bank came out with revised growth figures for the South Asian countries as well as India and slashed the growth percentage. India’s growth forecast has been lowered by almost 100 basis points, have reduced India’s for the FY2022-23 to 6.5 per cent.

This is a relatively lower estimate from its earlier growth projections for India, which was at 7.5%; India’s GDP in FY2021-22 grew by 8.7%.

The revision of growth figures by the World Bank led to subdued market sentiment, and almost all traders agreed that the outlook for the markets was not very optimistic.

Reserve Bank of India

India’s GDP forecast for the FY 2022-23 from its earlier estimates of 7.2% was slashed by the RBI and kept at 7%. The marked-down effect is due to the dollar strengthening and falling foreign reserves as India’s Exports have also taken a hit.

As US Federal Reserve officials have hinted at more rate spikes to tame its surging inflation has also made investors averse to risks.

Federal Open Market Committee (FOMC) Governor Lisa Cook had earlier stated that both a near-and-long term threat of inflation persists, and it is imperative to prevent inflationary psychology from taking hold in the markets.

Reason for the dollar strengthening

As central banks continue to raise interest rates amid rising inflation, the US economy has seen a sharp inflow of funds, strengthening the dollar against other currencies. This has increased worries in countries about the further import of inflation because of their dollar imports.

India’s Foreign Reserves

India’s foreign exchange reserves have declined by nearly $100bn this year, even as the Reserve Bank Of India defended the rupee against a climbing dollar.

India is relatively in a better space even as neighbouring countries such as Srilanka and Pakistan have dipped into financial crises because of the pressure from the rising dollar.

Most analysts agree that RBI’s intervention in the falling rupee, monetary tightening, and timely intervention in the foreign exchange market helped to defend the falling rupee.

Hence, these interventions helped to control the steeper depreciation of the rupee; meanwhile, other leading South Asian currencies continued to suffer this year.

Shaktikanta Das, RBI governor, stated that India’s foreign reserves remain adequate and stand at more than $500 billion; however, she did mention that the global economy was currently in the midst of a storm.

In a press conference, wherein she announced the fourth rate hike by the central bank this year, the repo rate hike by 50 basis points to 5.9 per cent.

She also reiterated that the country’s financial vulnerability is much lesser than that of most emerging markets/economies.

“Our assessment, taking into account the current level of reserves, taking into account the various vulnerabilities vis-à-vis the external sector — I think we are comfortably placed, and our buffers are quite strong,” she said.

However, between early 2022 to September 2022, India’s foreign reserve dwindled by about $96bn to less than $550bn in US dollar terms.

The above scenario faced by India was because of the revaluation of assets as a result of global financial volatility as well as depletion from the central bank’s currency market interventions.

About 67 per cent of the drop in reserves during the financial year from April was due to reductions in the relative value of non-dollar assets and US bonds.

The rupee had then fallen to a record low of nearly Rs82 to the dollar after pushing below 80. 

According to most analysts, this is the threshold the RBI was defending.

Although in spite of the drastic fall, many in the markets were assured that the RBI would continue to moderate and limit the depreciation of the currency of India.

Meanwhile, RBI has reiterated that it has no specified exchange rate target and intervenes to curb excessive volatility and anchor market expectations.

The point to be noted here is that the decline in India’s reserves has been relatively high regarding aggregate terms. However, this is anticipated due to the current situation, and when it is compared to Asian countries, their reserves are falling too.

The RBI’s intervention in the currency market was the most intense during the first month of the Russian and Ukrainian conflict.

India had then sold a net $20bn that month to support the rupee, and this was because the conflict had led to a rise in commodity prices.

The RBI’s initiative has helped the rupee surpass most other Asian currencies this year, falling less than 10 per cent against the US dollar.

Compare this with the declines of more than 15 per cent for the Korean won and Japanese yen.

India’s local capital controls have helped lower trade volatility in the rupee. However, RBI’s selling of reserves and the Indian economy’s relatively strong growth prospects have played a more significant role in easing stress on the currency.

While further market disruption could still be a threat, India still has ample forex reserves and sufficient to cover eight months of imports and is not in discomfiting territory yet in regards to external buffers.

Conclusion: While the Falling Indian rupee remains a cause of concern, timely and adequate measures taken by the Reserve Bank of India have helped arrest the Rupee fall and further depreciation of the Indian Rupee.

Although our foreign reserves have also registered a fall due to outward pressures – geo-political tension appreciating the dollar- the country’s reserves remain adequate.

All major global watchdogs have slashed the Growth Forecast for India, but it is still in a much more comfortable spot compared to the other emerging global markets.