Strong Rupee and Capital inflows cause Forex Reserves to reach highest in three weeks

In the week ending July 29, forex reserves increased by $2.315 billion, reaching $573.875 billion.

Advertisement

In the final week of July, India’s foreign exchange holdings reached their highest level in three weeks thanks to strong capital inflows and the rupee’s declining value following recent significant increases from 80 to below 79 per dollar.

In the week ending July 29, according to the Reserve Bank of India’s weekly supplementary statistics data, foreign exchange reserves increased by $2.315 billion to $573.875 billion from $571.560 billion the previous week.

That ends a four-week downward trend and is the highest level of FX reserves in that time.

The Reserve Bank of India sold dollars in the spot and futures markets in an effort to support the rupee, burning the nation’s foreign exchange reserves in the process. This was done particularly after Russia invaded Ukraine and the rupee plunged to an all-time low of 77 to the dollar before being thrown even lower to breach 80.

The RBI’s action has helped prevent the rupee from dropping much more drastically and crazily, despite the fact that it has plummeted dramatically from around 74 to a dollar at the beginning of the year.

For its part, the RBI has stated that it is prepared to take whatever action is necessary to stabilise the rupee. In fact, RBI Governor Shaktikanta Das had observed, “You buy an umbrella to use it when it rains!” in reference to the use of foreign exchange reserves by the central bank to manage currency volatility.

The most recent change in India’s import cover has been backed by the rupee’s recent strength. On Tuesday, the currency reached a one-month high, trading below 79 cents to the dollar as a result of strong capital inflows over the previous days and as the dollar dipped due to diminishing expectations of aggressive Federal Reserve monetary action in the face of recessionary fears.

For the first time in a year, foreign institutional investors became net buyers of Indian assets in July. This pattern has persisted, which has helped the rupee and the nation’s import coverage.

In fact, on the back of a declining dollar index and strong corporate earnings, foreign investors have switched from being net sellers for nine straight months to purchasers, investing about Rs 5,000 crore in Indian shares in July.

This stands in stark contrast to a net withdrawal from the stock market in June of Rs 50,145 crore. According to depositories’ data, the reverse in July was the largest net outflow since foreign portfolio investors (FPIs) withdrew Rs 61,973 crore from stocks in March 2020.

After nine consecutive months of significant net outflows beginning in October of last year, FPIs started to turn positive in July.

In the Indian equity markets, they sold a massive Rs 2.46 lakh crore between October 2021 and June 2022.

Many experts view that pattern as a market turning moment since it may be a reversal of a significant sell-off in Indian equities. Recently, international investors’ opinion has shifted in favour of Indian assets.

At a time when other smaller economies are battling with low foreign reserves, this is fantastic news for India and the nation’s war chest.

During the week ending July 29, the nation’s foreign currency assets (FCAs) increased by $1.121 billion to $511.257 billion while its gold reserves increased by $1.14 billion to $39.642 billion.

FCAs, which represent for a sizeable amount of total reserves and are expressed in dollar terms because the US dollar is regarded as the world’s reserve currency, take into account the growth and fall of non-US currencies held in FX reserves, such as the euro, pound, and yen.

The RBI increased its benchmark lending rate by greater than anticipated 50 basis points on Friday, making it the highest level since 2019 and teasing further actions to stabilise inflation and the rupee.

Subscribe to our newsletter
Subscribe to our newsletter
Sign up here to get the latest news delivered directly to your inbox.
You can unsubscribe at any time