Reuters predicts that India's foreign exchange reserves will hit their lowest level in more than two years by the end of 2022, as the Reserve Bank of India continues to shield the rupee against the rising of the mighty dollar.
The Reserve Bank of India (RBI) has reduced its foreign exchange reserves by approximately $100 billion, from a peak of $642 billion a year ago to $545 billion, in an effort that has thus far failed to halt the rupee's decline to a record low against the dollar. Additional reductions are forthcoming.
According to the consensus estimate of sixteen economists surveyed by Reuters on September 26-27, these reserves are likely to decline by a further $23 billion by the end of the year, to a total of $523 billion. If realized, that would be the lowest level in almost two years.
Predictions varied between $500 billion and $540 billion.
This means that the RBI's foreign exchange reserves will be depleted at a rate not seen since the global financial crisis of 2008, when they fell by about 20%.
It has depleted its reserves substantially quicker than during the taper-tantrum period in 2013, when the Federal Reserve abruptly halted its purchases of government bonds.
A decade later, India finds herself in a similar situation. Despite regular interventions via dollar sales and forecasts for more, the rupee has depreciated against the dollar by around 10 percent this year, reaching a new low of 81.95 per dollar on Wednesday.
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Sakshi Gupta, chief economist at HDFC Bank, stated, "With the latest surge in the rupee, I predict that the RBI would continue to interfere, perhaps not to protect a specific level of the currency, but to decrease volatility."
"In the coming days, there will be even more interventions to counteract the mounting pressure on the rupee and a widening current account deficit, which will result in a greater depletion of foreign exchange reserves by the end of the year."
A few analysts voiced concern that the overall foreign exchange reserves could drop more than anticipated over the following year due to a rising current account deficit, which was expected to reach its widest point in a decade by the conclusion of the fiscal year.
The Reserve Bank of India has lagged behind the Federal Reserve of the United States in terms of interest rate rises.
According to a separate Reuters poll, the Fed is expected to raise interest rates by an additional 150 basis points in the coming months, bringing them to a range between 3 and 3.25 percent.
The RBI, which only began increasing the repo rate in May and has only increased it by 140 basis points, appears to be reaching completion. It is projected to grow by a further 60 basis points over this cycle, with an increase of 50 basis points anticipated this week.
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Senior economist at Standard Chartered, Anubhuti Sahay, suggested that the Reserve Bank of India (RBI) should reduce the frequency of its interventions sooner rather than later to allow the INR to trade more in line with its fundamentals.
Our foreign exchange reserves should be sufficient for the next two to three years, not simply the next six months.
