RBI defended rupee with $41 billion over 5 months, says report – Times of India

MUMBAI: The Reserve Bank of India (RBI) is estimated to have spent more than $41 billion of its reserves since February this year in defending the rupee. As a result of this and the rising crude bill, the reserves — which were enough to cover over one year of imports — can now cover less than 10 months.
According to a report on India’s foreign exchange reserves by Barclays, while last week’s imposition of higher duties on gold imports and export levies on petroleum products are beneficial at the margin, they are unlikely to “materially alter the widening current account deficit”.

“We estimate the RBI has spent more than $41 billion of its reserves since February, with further declines in both spot and forward markets likely in the coming months. This fast depletion of reserves indicates the ferocity of pressure on the currency during the latest episode. Import cover has dipped back to single digits for the first time in over 34 months,” said Barclay’s in its report. Forex reserves as of June 24 stood at $593 billion, up $2.7 billion over the previous week.
The RBI, according to Barclay’s, will look to recoup lost reserves when the flows’ cycle turns, limiting the scope for a rupee appreciation. This is similar to the strategy adopted by the RBI in the past. “We have highlighted evidence that foreign reserves insure against financial crises, such as the current global risk-off event, which is why the RBI builds up reserves. This seems to have proved broadly correct, with the rupee largely stable over the entire Covid crisis,” the report said.
Barclay’s report has explained the need for the RBI’s intervention on the grounds that imported inflation is a major problem and supporting the rupee is a better alternative to curbing demand through rate hikes. Second, the rupee is not overvalued in terms of the real effective exchange rate (REER), which is calculated by measuring the rupee-dollar movement with the movement of a basket of other currencies.
Third, inflation is not as much of a worry in India as it is in the West. “Even in the current episode, price concerns in India are relatively less severe than in advanced economy peers, which are facing inflation at multi-decade highs. RBI deputy governor Michael Patra noted that inflation may have already peaked in India, with price pressures likely moderating faster than for global peers,” the report said.

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