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India’s foreign exchange reserves fell further as the central bank continues to intervene in the currency markets to cushion the fall in the rupee, which has depreciated more than 12 percent so far this year.
Forex reserves fell to $ 399.3 billion as on September 7, 2018, a drop of $819 million over the previous week. Foreign currency assets, the largest segment of reserves, fell $887 million in a week, showed data released by the RBI.
India’s forex reserves have fallen from a peak of $426 billion in April to just below $400 billion now.
Much of this has been account of dollar sales intended to slow down the depreciation in the rupee. While the movement of forex reserves gives some indication of the RBI’s intervention, more accurate data is released in the RBI’s monthly bulletins. Based on that, net dollar sales from the RBI added up to $13.78 billion between May-July. The data comes with a lag of two months.
Despite the fall, India is perceived to have adequate forex reserves to cover imports and short term debt payments.
At current levels, reserves are adequate to cover between eight and nine months of imports. The RBI has enough reserves to suffice for at least eight months of imports, said Rajni Thakur, economist at RBL Bank. Even another 5-8 percent decline in forex reserves should not be worrisome, Thakur suggested.
Other metrics of judging adequacy of reserves includes the ratio of forex reserves to external debt and short term external debt. According to a Yes Bank report, India’s forex reserves to external debt ratio is at 80 percent compared to the 5-year average of 74 percent. Short term external debt is at 24.1 percent of forex reserves compared to the 5-year average of 25.9 percent.
“India’s forex reserves appear comfortable and it reinforces the faith in central bank’s ability to mange excessive and unwarranted volatility in the Rupee,” wrote Shubhada Rao, chief economist at Yes Bank in a report released at the start of September.
While the reserves provide adequate comfort, the government is set to review the state of the economy and the recent fall in the currency over the weekend. The review meeting followed the rupee hitting a record low of 72.75 against the U.S. dollar earlier this week.
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