Foreign exchange reserves fall below $400 billion as RBI intervenes

Foreign exchange reserves fell below $400 billion, for the first time since November 11, 2017, in the first week of September.

As on September 7, foreign exchange reserves stood at $399.28 billion, a result of the Reserve Bank of India’s intervention at a time when portfolio flows were witnessing some reversals.

The reserves had peaked at $426 billion in mid-April, when rupee was at around 65 a dollar. However, it started falling once the central bank had to intervene in the market to check the rapidly falling rupee, starting May. The currency fell to its record low of 72.91 earlier this week, forcing the government to state that it will take some measures.

There was “no fundamental rationale for the rupee to depreciate” so much, tweeted economic affairs secretary Subhash Chandra Garg on Wednesday.

“It reflected overreaction of market operators,” Garg argued. The rupee has recovered sharply since then, and closed at 71.86 a dollar on Friday.

The currency markets were seen complaining that the central bank was not intervening enough, and that it was too fixated on keeping reserves intact at $400 billion even as the rupee had crossed 70 a dollar. The reserves are expected to fall further, as the RBI stepped up its intervention this week.

However, if the Centre and the RBI decide to raise dollar deposits from non-resident Indians, the reserves will rise.

The rupee is still the worst-performing currency in Asia, falling 11 per cent year-to-date against the dollar. Asian countries that run twin deficits are being punished by investors, but analysts are calling for coordinated action.

“We believe the time is right for Asia’s policymakers to start considering a collective, coordinated policy response should the depreciation of currencies in Indonesia, India and the Philippines intensify from here,” Nomura wrote in a report.

The weekly dip in reserves, which stood at $819.5 million, was led by foreign currency assets, which fell $887.4 million.

Valuation of gold in the reserves rose $71.9 million to $20.2 billion.