Home / News / India /  Forex reserves drop by $897 mn to $572.98 bn in the latest week. What you should know

India's forex reserves declined in the week ending August 5 by $897 million compared to an upside of $2.315 billion in the previous week. A sharp drop in foreign currency assets (FCA) dragged total reserves during the week. Also, a marginal dip is seen in the reserve position in the IMF. While reserves in Gold and SDRs witnessed an upside during the week. Meanwhile, the Indian rupee stays near 79.75 against the US dollar, while inflation has eased slightly, however, does not erode the rate hike trend ahead. As for foreign funds, so far August month has seen the biggest buying up till now in 2022.

As per RBI's latest data, India's total reserves stood at $572.978 billion in the week ending August 5, down by $897 million. In the week ending July 29, 2022, total reserves surged by $2.315 billion.

In the latest week, FCA registered a decline of $1.611 billion to $509.646 billion. FCA is the major instrument in measuring the total forex reserves of India. In the week ending July 29, FCA saw an increase of $1.121 billion.

Meanwhile, gold reserves continued to outperform FCA for the second straight week with an upside of $671 million to $40.313 billion. However, the latest weekly gold reserves are lower from the $1.140 billion jump recorded in the week ending July 29.

In the week ending August 5, SDRs climbed by $46 million to $18.031 billion. While reserve position in IMF dipped by $3 million to $4.987 billion during the week.

Earlier this week, S&P Global Rating stated that the Indian economy can handle some erosion of its foreign exchange reserves as its external position is very strong.

The American-based credit rating agency also said that high global commodity prices and capital outflows have put pressure on the Indian rupee's exchange rate and depleted the foreign exchange reserves. However, S&P does not think the Indian economy has any reason to worry.

On Friday, the Indian rupee settled at 79.74 against the US dollar at the interbank forex market declining by 12 paisa from the previous day. This was amidst a strong greenback against a basket of currencies and a spike in crude oil prices which offset the impact of buying sentiment in domestic equities.

Although US inflation stays closer to multidecadal, the drop in July month to 8.5% has sparked expectations of easing in the aggressive monetary policy approach and a hike in the key interest rate at a slower pace. Inflation was at 9.1% in June 2022.

IIFL Securities in its currency mantra report dated August 12, said on US inflation data which slowed more than expected, that the latest inflation report makes a 50 basis points hike more likely at the September meeting rather than a 75 basis points increase, although a lot will depend on the August CPI release next month.

Not just US has witnessed a deceleration in inflation data, but India also saw a drop in its consumer price index and reached a 5-month low. In July, India's inflation eased to 6.71% from 7.01% in June month. However, inflation continues to stay above RBI's comfort zone of 6% for the seventh consecutive month.

On economy and markets, Arafat Saiyed - Senior Research Analysts at Reliance Securities said, "The RBI raised interest rates by 50bps to 5.4% in order to curb inflation. The RBI has maintained real GDP growth forecast of 7.2% and a CPI inflation forecast of 6.7% for FY23, assuming the average price of crude oil for the Indian basket at $105 per barrel. The Indian economy faces headwinds from global forces such as geo-political tensions, rising financial market volatility, tightening financial conditions, and recessionary concerns. The Russia-Ukraine war continues to play a key role in affecting global markets."

In August policy, RBI hiked the repo rate by 50 basis points - taking the rate to 5.40%. Overall, so far this year, the repo rate has increased by 140 basis points to tame multi-year high inflation.

Saiyed added, "The Indian equities gained strongly in last 2 months, the rise in repo rate coupled with the inflation is likely to impact the market in the near term. However, we expect a strong economic rebound, normalized commodity prices, inflation within a targeted range, and better visibility in 2HFY23."

Meanwhile, foreign portfolio investors (FPIs) have made their biggest buying so far in 2022, in the equity market with a funds inflow of 22,453 crore so far in August.

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