India’s foreign exchange reserves declined for two consecutive weeks in February 2023, after rising for three straight months from November 2022 to January 2023. The week ending February 10, 2023 witnessed the sharpest fall in weekly reserves since April 2022. The reserves plunged by $8.4 billion.
The Adani-Hindenburg saga caused a massive sell-off in the Indian equity market, and foreign institutional investors sold Rs 10,068.3 crore over the past 30 days. At the same time, the Indian rupee took a hit as the US Federal Bank raised interest rates by a further 25 bps on February 1, 2023. The Reserve Bank of India (RBI) has been selling US dollars to put a floor under the rupee’s depreciation. This was the major reason for the decline in the foreign exchange reserves.
Despite the decline in reserves, data shows that India is still at double the reserve levels in 2013, when the RBI had gone on a dollar selling spree as the US Fed slowed its pace of bond buybacks.
How is India doing relative to other emerging markets? For comparison, we can look at some economies in the world which are facing tough challenges for economic growth. Pakistan’s foreign exchange reserves has suffered a drastic decline of 61.4% since February 2022 and stands at a meagre $8.7 billion as of January 2023. The country had already secured a $6 billion bail-out from the International Monetary Fund (IMF) in 2019 followed by another infusion of $1 billion in 2022. It has a total foreign debt of $126 billion which includes loans from China, the World Bank and the Asian Development Bank.
Another neighbour, Sri Lanka declared bankruptcy in July 2022 with a possibility of having to default on its sovereign debt repayment. The country’s foreign exchange reserve stands at just $1.9 billion as of December 2022, down 19.6% since January 2022 with loans from the IMF, China, India and Japan.
On the other side of the world, Turkey has seen its foreign exchange reserves fall to $75.6 billion in February 2023, its lowest level since July 2022. But it is still 21.9% higher than its multi-month low in August 2022.
Despite the drop, India still has a comfortable reserves cushion, although the impact of the trade deficit and appreciating dollar in the coming months will have to be closely monitored. At its current level of $566.9 billion, India’s foreign exchange is estimated to cover for 9.2 months of imports projected for FY23.
