India's forex reserve depleting at a high rate even when compared to the taper tantrum period

20 Sep 2022 , 08:42 AM

In an effort to avert an overshoot in the rupee, India’s central bank is depleting its foreign exchange reserves more quickly than it did during the taper-tantrum period in 2013, but economists noted that a greater pool of reserves might allow it to continue supporting the currency.

According to information released on Friday, the Reserve Bank of India sold a net amount of $38.8 billion from its foreign exchange reserves between January and July of this year.

According to the most recent statistics available, a net of $19 billion was sold in just July alone. News reported that intervention continued intense in August when the rupee went below 80 against the dollar.

The central bank’s holdings of forward-priced dollars have decreased from $64 billion in April to $22 billion, along with its intervention in the spot market.

The so-called “taper tantrum,” in which U.S. Treasury yields soared after the Federal Reserve announced it would decrease the pace of bond buybacks, placed pressure on developing-nation currencies, especially the rupee, caused the RBI to sell a net of $14 billion in bonds from June to September of that year.

India’s foreign exchange reserves reached a record of $642 billion in October 2021 before declining to a two-year low of $550 billion. A decline in the value of dollar-denominated assets as well as a decline in the value of major currencies like the euro and yen against the dollar have an effect on reserves in addition to actual dollar sales.

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