India's Forex Reserves May Decline Further, Says Deutsche Bank; Check Details

Although India’s spot forex reserves have fallen from $607 in end-March to $561 billion by end-August, Deutsche Bank on Wednesday said that the country’s foreign exchange reserves are expected to fall further due to high current account deficit (CAD) and RBI’s interventions to bolster the rupee.

The bank in a note said India’s trade deficit may rise to as much as $300 billion in the financial year 2022-23, pushing the current account deficit to about $140 billion, or 3.9 per cent 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 Kaushik Das, chief economist (India and South Asia) at Deutsche Bank.

In August, India’s exports contracted by 1.15 per cent to $33 billion for the first time in over 20 months, while the trade deficit more than doubled to $28.68 billion due to increased crude oil imports, according to official data. Imports rose 37 per cent to $61.68 billion in August this year. Trade deficit in August 2021 had stood at $11.71 billion.

Deutsche Bank’s Das said the deficit in FY23 might be at $100 billion-$105 billion. The overall forex reserves, including spot rupee and forwards, stood at of $578 billion at the end of August and is likely to fall to below $550 by the end of this fiscal year, he added.

In the week ended August 26, the country’s foreign exchange reserves declined by $3.007 billion to $561.046 billion , according to RBI data. In the previous week ended August 19, the reserves had dipped by $6.687 billion to $564.053 billion.

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The fall in the reserves during the reporting week ended August 26 was on account of a dip in the foreign currency assets (FCA), a major component of the overall reserves, and the gold reserves, according to the Weekly Statistical Supplement released by the RBI on Friday. FCA decreased by $2.571 billion to $498.645 billion in the reporting week.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves. Gold reserves decreased by $271 million to $39.643 billion, the data showed.

Experts also say that the forex reserves have witnessed a fall as a result of the Reserve Bank of India’s (RBI) intervention to rein the currency volatility. In 2022, the rupee has declined by about 7 per cent, which has also made imports costlier. The domestic currency has hit its record lows multiple times in the past few months due to capital outflows amid global economic uncertainties.

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