India's external position has further speed bumps ahead as forex reserves hit near-2 yr low

New Delhi and Mint Street have voiced in recent months that despite the decadal-high inflation abroad, the external position of India is fairly healthy. But in the face of a strengthening dollar, and a widening trade deficit, the Reserve Bank of India has moved swiftly to defend the Rupee. The dwindling foreign exchange reserves are likely to leave India’s external position in a precarious spot.

India's foreign exchange reserves have now dropped to their lowest since October 2020. FX reserves dropped to $553.1 billion in the week ended September 2, a decline of almost $8 billion from the previous week, according to data released by the RBI on Friday.

It was the biggest drawdown in reserves since early July, as the RBI seeks to avoid the psychological level of 80 for the Rupee. The domestic currency had fallen to a record low of 80.12 in the week ended September 2.


The RBI governor Shaktikanta Das recently said the central bank will anchor expectations around the depreciating rupee and intervene to prevent an overshoot, ensuring the exchange rate reflects fundamentals.

Experts have said that India’s forex reserves are expected to fall further.

"With the RBI's proactive FX intervention expected to continue - to smoothen volatility and prevent excessive depreciation in rupee - FX reserves are likely to fall further from current levels," said Kaushik Das, chief economist, India and South Asia, Deutsche Bank.

ET on Monday reported that the central bank likely sold around $13 billion in the spot market in August, the highest monthly currency market intervention so far in 2022-23.

As per the latest data from RBI, foreign exchange reserves plunged by nearly $21 billion to $553.1 in five consecutive weeks between July 29 and September 2.

India’s adjusted forex reserves, including forwards, have declined at an ‘unsustainable’ monthly pace of $17 billion over the past five months, wrote Divya Devesh, head of ASEAN and South Asia FX research at Standard Chartered Plc, in a note.

“The Rupee will stay between 78.50-81 in the coming months,” said Megh Mody - Commodities and Currencies Research Analyst, Prabhudas Lilladher Pvt Ltd.

The spiralling trade deficit, a threat

Data shows that India’s merchandise imports in August stood at $61.68 billion while exports stood at $33 billion, leaving a deficit of $28.68 billion. With imports rising and exports hitting a plateau amid poor global demand, India’s current account deficit is expected to rise, putting further strain on the local currency and forex reserves.

Deutsche Bank in a research note estimated India’s trade deficit to rise to as much as $300 billion in the current fiscal, pushing the current account deficit to about $140 billion, or 3.9% of the GDP.

"If the current account deficit indeed rises to $140 billion, the overall BOP (balance of payment) deficit could be as large as $80 billion for FY23, as we are forecasting a capital account surplus of about $60 billion," said Das.

Between April-August 2022, India’s trade deficit widened to $125.22 billion.

“India’s trade deficit is now going to something like $30 billion a month which is a crippling amount it is not sustainable so we are suffering in a very major way,” said Swaminathan Aiyar, Consulting Editor, ET Now.

“If this kind of thing continues for 12-13 months in India our foreign exchange reserves will be under enormous pressure, there are consequences for India too,” Aiyar said.