The rupee has depreciated 9.7 per cent against the US dollar over a year and with the RBI stemming the rupee’s weakness through dollar sales, its reserves have dropped to their lowest levels since October, 2020.
The fall in reserves has widespread implications.
Forex reserves: The headline foreign exchange reserves have decline to $545.65 billion as on September 16, 2022.
Some of that is owing to revaluation in the face of a stronger dollar, but analysts say a major part of the fall is due to the RBI’s interventions in the forex market.
Rupee depreciation: The rupee has depreciated 9.7 per cent against the dollar since September 2021.
Year-to-date, it has depreciated 8.9 per cent, but this is far lower than that seen during the Global Financial Crisis of 2008 and the taper tantrum of 2013.
US dollar index: The US Dollar Index has strengthened 21.8 per cent since September 2021 and is at its highest level in 20 years as the US Federal Reserve has embarked on the most aggressive tightening cycle since 2004.
RBI liquidity operations: Liquidity surplus in the banking system as measured by the RBI’s absorption of excess funds has come down sharply since September 2021.
On September 20, 2022, liquidity slipped into a deficit for the first time since May 2019.
Since then, it is hovering around neutral-to-deficit liquidity.
Import cover: The import cover provided by the RBI’s foreign exchange reserves have reduce to 9 months (imports projected for the financial year) as on September 2, 2022.
The import cover was at close to 15 months when the FX reserves were at their all-time high of $642.45 billion on September 3, 2021.
Forex intervention: The RBI’s dollar sales in the spot foreign exchange market have increased markedly over the last few months, with the central bank selling $23 billion in June and July 2022 to shield the rupee from excessive volatility.
RBI forwards book: The RBI’s net outstanding forwards purchases have reduced sharply in FY23 as RBI has been taking delivery of its forward dollar purchases in order to prevent the headline reserves from falling too rapidly.