India’s forex reserves rose to a three-week high in the last week of July, supported by robust capital inflows and the weakening reversal of the rupee to sharp gains of 80 per dollar to below 79.
Weekly supplemental statistics from the Reserve Bank of India showed that forex reserves rose $2.315 billion to $573.875 billion in the week ended July 29, from $571.560 billion in the previous week.
That marks the highest FX reserves in three weeks and marks a four-week downtrend.
The Reserve Bank of India has burned the country’s forex reserves in an effort to bolster the rupee by selling dollars on the spot and futures markets, especially since Russia invaded Ukraine and the rupee plunged to 77 per dollar and below for the first time ever. was thrown. to break 80 against the greenback, the all-time lowest level.
While the rupee has fallen significantly from around 74 per dollar at the start of the year, the intervention of the RBI has helped prevent the currency from weakening more sharply and wildly.
The RBI, for its part, has said it is ready to do whatever it takes to stabilize the rupee. Indeed, the governor of the RBI, Shaktikanta Das, had said ‘you buy an umbrella to use it when it rains!’, indicating that the central bank uses foreign exchange reserves to absorb the volatility of the currency.
The recent strength of the rupee has supported the latest reversal in India’s import coverage. The currency hit a month-to-month high on Tuesday, trading below $79 per dollar on significant capital inflows in recent days and as the greenback stumbled over easing bets on aggressive Federal Reserve monetary action amid fears of a recession.
Foreign institutional investors became net buyers of Indian assets for the first time in a year in July. That trend continued, bringing relief to the country’s rupee and import coverage.
Indeed, after nine consecutive months of relentless selling, foreign investors have become net buyers, investing nearly Rs 5,000 crore in Indian stocks in July due to a weakening dollar index and good corporate earnings.
That is in stark contrast to a net withdrawal of Rs 50,145 crore from the stock market in June. The turnaround in July marked the highest net outflow since March 2020, when foreign portfolio investors (FPIs) withdrew Rs 61,973 crore from equities, custodian data showed.
FPIs became net buyers for the first time in July after nine consecutive months of massive net outflows that began in October last year.
Between October 2021 and June 2022, they sold a whopping Rs 2.46 lakh crore in the Indian stock markets.
Recent international investor sentiment in favor of Indian assets could be a reversal of a deep sell-off in Indian equities, and many experts point to that pattern as a turning point for the markets.
“This sends us a positive signal that things might not be so bad for foreign investment in stock markets,” Madan Sabnavis, chief economist at Bank of Baroda, told NDTV.
“If this trend continues, it could be a turning point for the stock markets; it would also help the rupee as foreign outflows that pull money away drag the rupee,” he had added.
That is good news for India and the country’s war chest. Other smaller economies face a looming crisis as they struggle with low forex reserves.
The country’s foreign exchange assets (FCAs) rose $1.121 billion to $511.257 billion, and gold reserves rose $1.14 billion to $39.642 billion during the week ending July 29.
A significant portion of the total reserves are FCAs, which are denominated in dollars as the dollar is considered the world’s reserve currency and takes into account the rise or fall of non-U.S. currencies such as the euro, sterling and yen , which are held in FX reserves.
On Friday, the RBI raised its key lending rate by more than expected 50 basis points to its highest since 2019, hinting at more steps to stabilize inflation and the rupee.