The weakening Indian rupee is now depleting the country’s foreign exchange reserves. The Indian currency has been in a free fall since Russian forces invaded Ukraine in late February.
When the invasion started on February 24, the Indian rupee was in the range of 73-74 to the US dollar. It then breached the 77 mark and on Wednesday hit an all-time closing low of 77.58 to the US dollar. Many analysts expect the rupee to drop even further.
Steep rises in fuel and commodity prices have put pressure on the Indian currency. India meets nearly 85% of its oil needs through imports. The weakening rupee has also increased import costs.
The war in Ukraine has also resulted in massive capital outflows from emerging markets, including India, as investors seek safe-haven assets. The recent rate hike by the US Federal Reserve and an indication of more hikes in the future have further increased this outflow.
Foreign portfolio investors have been relentless in pulling money out of Indian capital markets and for the eighth consecutive month to April, they remained the net sellers. For seven months to March, they have pulled out about 1.65 trillion rupees from equities in India.
This consistent pressure on the Indian rupee has forced the Reserve Bank of India to intervene by selling off dollars to slow the depreciation of the Indian currency. The central bank sold $20 billion in March in the spot markets – the highest ever in a month. The previous high was in October 2008 and was $18.66 billion.
Due to the heavy selling of dollars by the central bank, the country’s foreign exchange reserves have fallen by about $35 billion since the fighting broke out in Ukraine in late February this year.
The reserves had touched an all-time high in September last year of $642.4 billion, but it was down to $595.95 billion as of May 6.
According to the central bank’s weekly statistical supplement data, this is the ninth consecutive week of declines. It is also the lowest since March last year.