RBI’s ‘Save the Rupee’ bill has hit over $40 billion already and it could add another $40 billion this year

• RBI has used the post-pandemic era of quantitative easing to shore up its forex reserves, but it looks like the better days are over for now.
• Over the last six months, India’s forex reserves have fallen by over $40 billion, with the RBI intervening to prop up the falling Rupee.
• Boiling crude oil prices, rising interest rates and foreign investor selloff have also contributed to the decline in India’s forex warchest.

The Rupee fell by over 6% against the US dollar this year – but it’s no free fall. The RBI has been doing all what it takes to arrest its fall with an old but effective strategy — the dollar deluge.

And it has cost the Indian central bank a pretty penny — the bill came up to $40 billion, according to data from the RBI website.

Experts believe that RBI has done a good job of reducing the volatility. After touching record lows twice last week, Rupee settled at 78.94 as of July 4.

“The RBI is not really targeting a level – targeting a level won’t work. They are trying to keep the rupee stable by keeping the volatility low. This is something that they have achieved remarkably well,” Anindya Banerjee, vice president, currency and interest rate derivatives at Kotak Securities told Business Insider India.

Banerjee’s comments indicate that without RBI’s intervention, it could have fallen much further. As of now, Rupee’s fall is comparable to that of China’s Renminbi, Malaysia’s Ringgit and Thai’s Baht — and a point to note that these countries have a current account surplus while India has a current account deficit.

“It is important to note that India’s current account balance has been extremely contained between a surplus of around 1% and a deficit of 2% of GDP over the past nine years, while it has posted a balance of payment surplus almost every year in the past decade, except in FY19,” said a report by Motilal Oswal.

And, on an average annual basis, INR weakened every year except FY18. The report says that the current movement of INR is an anomaly and predicts that it could touch 80 against the dollar and come back to 77 in the next financial year. As per JM’s estimates, Rupee could go as low as 82 this financial year.

The dollar hoarding and an endurance test

Anomaly or not, RBI has been preparing for an event such as this by building its reserves – especially last year. Over the course of 2021, RBI built one of the highest forex reserves in the world, crossing the $640 billion mark. For a country that barely escaped a default three decades ago, it’s an important achievement.

RBI’s forex reserves were on track to touch the $700 billion mark, but an unexpected duo of geopolitical concerns and a boil in crude oil prices helped strengthen the US dollar against most of the currencies in the world.

RBI shifted its stance from that of a hoarder to a spender. It has been actively intervening in the forex markets to keep the rupee stable – not too strong and not too weak, experts told Business Insider India.

But how much has this cost the Indian central bank?

According to data from RBI, India’s forex reserves stood at nearly $634 billion at the end of 2021. Over the last six months, these reserves fell to $590 billion mark, registering a decrease of over $40 billion – accounting for nearly 7% of the reserves it had at the end of 2021.

According to a JM Financial report, these reserves, along with well capitalized banks are potential counter-balancing buffers. But these strengths can be tested.

“Our estimates indicate that there can be a further $40-50 billion drain in FY23E, and global stagflationary phases are typically followed by a phase of banking, currency and debt crisis in emerging markets (1980s-90s),” stated a report by JM Financial.

Challenging 2022 keeps RBI on its toes

RBI had to step in to save its currency as crude oil went up from $77 per barrel to over $111.1 as Russia-Ukraine war made India’s largest import, too expensive to bear.

Here’s how things have fared over the first six months of 2022:

Boiling crude and fleeing FIIs

While India has secured a discount from Russia on its crude oil imports, it still accounts for a small part of India’s total crude oil imports. The gulf countries still have the lion’s share which is undiscounted.

Adding to that, in the first six months of this year, foreign investors have pulled out over $36 billion — taking away their dollars with them.

In a conversation with Business Insider, Shrikant Chouhan, executive vice president of Kotak Securities explained that despite the 11% correction this year so far, Indian equity markets have performed considerably better than the US.

What this means is that the US markets have corrected better, and therefore provide a better investment opportunity than markets like India. The strong dollar and a declining rupee have also likely figured in the investment rationale of foreign investors, who have so far decided to go with the US rather than India.

Adding to the laundry list of growing economic problems, the government is also faring poorly on the fiscal deficit front, with the deficit touching 12% of the budgeted estimate in April and May 2022, as compared to 8% in the previous year.

However, on a positive note, the growing deficit was primarily driven by capital expenditure towards railways, roadways, agriculture, and defence — all which will ensure GDP grows – an answer to most of India’s economic problems.

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