With RBI expected to aggressively shore up the rupee, analysts expect forex reserves to dip below $400-billion mark.
New Delhi: The rupee faced a fresh crisis Monday as it touched an all-time low of 69.93 to a dollar, sparking new fears that India’s foreign exchange reserves could drop below the $400 billion mark soon.
The fall of the rupee comes amid rising concerns over fresh US sanctions against Turkey.
The recent dispute between the US and Turkey has impacted the global economy, leading to sudden broad flight of money from emerging markets. The Trump administration has announced fresh economic sanctions by doubling duties on imported Turkish steel.
With rising uncertainty in the global economy, the rupee depreciated faster than expected. Currency analysts have indicated that the rupee could breach the psychological 70 to a dollar level sooner than expected.
A weak rupee will have a bearing on the country’s trade deficit figure and current account deficit (CAD) — the difference between inflow and outflow of foreign currency — especially as over 70 per cent of the country’s oil requirement is imported.
Besides, a strong rupee and healthy forex reserves have been key campaign issues for the Modi government.
Also read: RBI steps in after India’s forex reserves soon to dip below $400 billion
“The rupee has depreciated primarily due to developments in the emerging markets, in particular following sanctions against Turkey and, earlier, Russia,” Saugata Bhattacharya, chief economist, Axis Bank told The Print. “But we must understand that the impact of these shocks has been quite limited on the rupee, in comparison to many of its emerging market peer countries.”
India’s forex troubles
On 3 August, foreign exchange reserves dipped to $404 billion — its lowest after touching a high of $426 billion in April. Reserves shot past the $400 billion mark for the first time in September last year.
But currency analysts said the drop in reserves was imminent since the Reserve Bank of India (RBI) was expected to continue its efforts in cushioning the Indian currency.
The RBI has been aggressively supporting the rupee, which has lost about 8 per cent of its value during this year.
Also read: With US-China trade war heating up, the sorry state of India’s exports may worsen
Besides, RBI intervention to support the rupee, capital outflows is also another reason for the drop in the reserves, analysts said.
A healthy foreign exchange reserve helps in international payments while providing cushion against exchange rate risks.
“Forex reserves always come handy for international payments… it helps in financing CAD. Around 2013, the problem was more intense as CAD was at a very high level and our forex reserves were not very high,” Nirupama Soundararajan, senior fellow at policy think tank Pahle India, told The Print.
A senior government official, however, said there was no need to panic as this recent fall of the rupee was driven by global developments.
“Our macro-economic fundamentals are strong… this fall was due to developments in Turkey. We have our eyes on the situation and we will ensure that situation is under control,” the official said.
70 is a psychological barrier, true, but, absent RBI intervention, we have already gone past that mark. The RBI would be well advised to hold on to its reserves. As it is, these have not been built up through consistent trade surpluses, as China’s $ 3 trillion hoard has, but are balanced by external liabilities such as NRI deposits. India Inc has also borrowed a lot abroad.