India's foreign exchange reserves fall by 2 billion

The surge in hedging activity came during a volatile week that began with the rupee rallying to 82.9475 per dollars on Monday after exit polls showed Prime Minister Narendra Modi's party and its allies won a comfortable majority.

India's foreign reserves fell by just over 2 billion dollars, moving away from a record high a week earlier. The Reserve Bank of India (RBI) said foreign exchange reserves rose 4.49 billion dollars to 648.77 billion dollars last week, marking the third consecutive weekly increase.

New record

This is a new record high for foreign exchange reserves. Earlier, the latest data released by the RBI showed that foreign exchange reserves declined for the third consecutive week. India's foreign currency assets (FCA), the largest component of foreign exchange reserves, fell by 151 billion dollars to 567.4 billion dollars. Gold reserves fell by 482 million dollars to 56.713 billion dollars.

According to the RBI report, India's foreign exchange reserves are now sufficient to cover about 11 months of projected imports. RBI plans to increase foreign exchange reserves by 58 billion dollars in 2023. Foreign exchange reserves will decrease by 71 billion dollars in 2022 and increase by about 28 billion dollars in 2024.

Impact of RBI

RBI intervenes in the market from time to time through liquidity management, for example, by selling the dollar to prevent sudden depreciation of the rupee; RBI closely monitors the foreign exchange market and is not bound by a predetermined target level or target range, but only maintains order in the market by limiting excessive exchange rate volatility. It intervenes only for the sake of intervention.

Foreign exchange reserves

Foreign exchange reserves or Forex reserves are assets held by a country's central bank or monetary authority. Foreign exchange reserves are usually held in dollars, but can also be held in euros, Japanese yen, British pounds or other currencies.

Official results

However, official results on Tuesday showed that the ruling alliance party almost maintained its majority, causing the rupee to fall to 83.53.

That range is roughly in line with the 83.00-83.50 range the rupee has been in for the past two and a half months and is "well expected" in the near term, said a foreign exchange market trader at a large private bank.

"Two factors have contributed to the rise in hedging. The first is the perceived increase in the political risk premium and the second, more importantly, is the range the rupee itself has found itself in," he said. - "The rupee's rally on Monday was an opportunity for importers and the subsequent fall was an opportunity for exporters." The currency is holding in a narrow range, helped by regular interventions by the Reserve Bank of India.

Central Bank

The central bank has repeatedly sold dollars around 83.50 to prevent it from breaching the historic low of 83.5750 reached in April. On the other hand, the RBI is widely expected to use any major rupee appreciation to build up foreign exchange reserves.

"When you have a currency that has been sticking to established ranges for a long time, it makes sense for companies to take advantage of a move that occurs near the upper or lower end of that range," said Kunal Kurani, assistant vice president at Mecklai Financial.