Forex reserves continue to decline, at $561 billion. Here’s why

India’s foreign exchange (forex) reserves declined further to $561 billion in the week ending August 26, 2022. The major component in reserves, foreign currency assets (FCA) weighed on the downside, while indicators contracted as well. The performance comes amidst the comeback of foreign funds outflow and a strong dollar due to the US Fed’s hawkish comments. The country’s forex reserves are expected to be under pressure as fears of a slowdown in the global economy escalate cautiousness in the market.

In the week ending August 26, RBI’s data showed that India’s forex reserves came in at $561.046 billion declining by $3.007 billion compared to the previous week. FCA dropped by $2.571 billion to $498.645 billion in the week under review.

Meanwhile, among other components, gold reserves shed $271 million to $39.643 billion in the week ending August 26. Further, SDRs fell by $155 million to $17.832 billion, and the reserve position in the IMF dipped by $10 million to $4.926 billion.

Dr. Nishant Srivastava, Head – Retail Broking

and Distribution of Reliance Securities said, “The foreign exchange reserves have declined as we are witnessing some slow down in FII buying over the past few days as dollar index again has resumed to its 20 years high of 109 levels which could put pressure on emerging markets.”

Data from Stock Edge, which tracks FIIs’ performance on Nifty, revealed that in 2 days of September FIIs have sold 2,299 crore in equities. In August, FIIs bought 22,025.62 crore.

August is the only month where FIIs were net buyers so far in the current year. The drop in two days of September hints toward the resumption in foreign funds outflow.

The biggest FII outflow in the equities was during June and May to the tune of 58,112.37 crore and 54,292.47 crore respectively.

In the first six months of 2022, FIIs have removed 2,83,405.32 crore. The second half of the year also began on selling pressure but with a slowdown in outflow to 6,567.71 crore. However, FIIs emerged as aggressive buyers in August which aided in recovering some of the previous losses year-to-date.

Overall, FIIs outflow in the Indian equity market is currently at a record level due to macroeconomic uncertainties. So far, in 2022, FIIs have removed 270,246.51 crore from the equities. The last time, FIIs sold in lakh crore was during 2008 when the outflow stood at 101,802,5 7 crore.

Last month, in the Jackson Hole speech, US Federal Reserve chair Jay Powell stated to keep high-interest rates to fight inflation at cost of economic growth. The US dollar reached its highest level in two decades and many analysts are expecting it to strengthen further against a basket of currencies, making the rupee vulnerable.

On Friday, the Indian rupee depreciated to settle at 79.87 against the American currency as strong dollar demand from importers and weakness in the equities market dampened the sentiment.

“A surging dollar index and rising US bond yields could be reflected in the elevated volatility of the domestic market in the near term,” Vinod Nair, Head of Research at Geojit Financial Services said.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services on Friday said, “FIIs are increasing their short positions in derivatives. This is a rational response to the surging dollar index which touched a 20-year high of 109.6% yesterday. This, and the US 10-year bond yield racing to 3.26% are unfavorable for emerging market equities and therefore investors have to be cautious in the near-term.”

In the upcoming week, Apurva Sheth, Head of Market Perspectives, Samco Securities said, “given the absence of major domestic events, Indian market sentiment will be influenced by its global counterparts to determine its movement. Investors around the world will be keeping a close eye on China’s inflation figures. Other important factors that may influence the market include the volatility of oil prices and the USDINR. Investors should pay attention to stock-specific events.”

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