The Reserve Bank of India (RBI) has decreased its foreign exchange reserves by almost $100 billion, bringing the total down to $545 billion from a peak of $642 billion a year ago. More reductions are on the way as part of a fight that has thus far been unsuccessful in preventing the rupee's decline to a historical low in relation to the dollar.
These reserves are anticipated to reach $523 billion by the end of the year, which is a fall of another $23 billion from their current level, as indicated by the median forecast from a survey of 16 economists done by Reuters on September 26–27. If those estimates are accurate, it would be the first time in almost two years that the level has been so low.
The range of predicted values was between 500 to 540 billion dollars.
This suggests that the Reserve Bank of India will continue to deplete its foreign exchange reserves at a rate that has not been seen since the global financial crisis of 2008, when they fell by about 20%.
It is already burning through reserves at a substantially faster rate than it did during the taper-tantrum phase in 2013, which was the year when the US Federal Reserve dramatically decreased the amount of money it was spending on government bonds.
After ten years, India is still dealing with a situation that is very similar. In spite of ongoing dollar sales and forecasts for more, the value of the rupee has decreased by about 10% so far this year in comparison to the value of the dollar. On Wednesday, the rupee reached a record low of 81.95 per dollar.
"With the last rise we have witnessed in the rupee, I expect the RBI to continue intervening," said Sakshi Gupta, chief economist at HDFC Bank. "I expect the RBI to continue intervening to perhaps not try and preserve a particular level of the currency, but certainly try and decrease volatility." [Citation needed]
"we will witness even more interventions in the days to come, culminating in a greater drain in the FX reserves by the end of this year," the author predicts, as the pressure on the rupee and the current account deficit continue to increase.
One of the variables that contributed to the depletion was the Reserve Bank of India's (RBI) inability to raise interest rates at the same rapid pace as the Federal Reserve of the United States (Fed).
The results of a separate poll conducted by Reuters indicate that it is currently projected that the Federal Reserve would raise interest rates by an additional 150 basis points over the course of the next several months, bringing them from a range of near zero in March to 3.00–3.25%.
The Reserve Bank of India (RBI), which has just begun gradually increasing interest rates since May and has only brought the repo rate up by 140 basis points, appears to be close to completing its work. It is projected that it will climb by a further 50 basis points this week, bringing the total number of basis points added to this cycle to a total of 60.
"the RBI should lower the rate of intervention sooner rather than later to allow INR to trade more in accordance with fundamentals," said Anubhuti Sahay, senior economist at Standard Chartered. "The INR should trade more in accordance with fundamentals."
According to this declaration, our foreign exchange reserves need to be sufficient not just for the approaching six months but also for the next two to three years.
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