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Ukraine war, aggressive Fed notwithstanding, India could weather the storm on FX front.


Date: 27-05-2022
Subject: Ukraine war, aggressive Fed notwithstanding, India could weather the storm on FX front
NEW DELHI: The surge in global commodity prices following Russia’s invasion of Ukraine in late February and the US Federal Reserve’s rate hike plans have exerted pressure on India’s external balances, but Standard Chartered Bank has confidence in the country’s buffers against global factors.

Based on various external-sector buffer parameters, India’s reserve levels are likely to remain solid even in an adverse scenario, economists from the foreign bank wrote recently.

The level of foreign exchange reserves that the bank considers representative of an adverse scenario is around $550 billion, according to the report.

“...even in an adverse scenario, the import cover will remain close to 9.5 months (the worst reading was c.6.5 months of import cover in May 2013), while short-term debt plus a six-month import cover would be c.1.1 (versus 1.46 in 2013),” Standard Chartered Bank’s economists Anubhuti Sahay and Kanika Pasricha wrote.

“We thus believe India will be able to weather this storm. However, risks could emerge if global conditions remain unfavourable beyond 2023.”

TABLE ON FX MOVEMENT SNAPSHOT

Latest data on the Reserve Bank of India’s website showed that as on May 13, the central bank’s total foreign exchange reserves were at $593.28 billion. Since mid-February till the week ended May 6, the central bank’s FX reserves have declined $37 billion, Standard Chartered Bank’s report said.

The sharp decline in the RBI’s FX reserves suggests that the central bank has been intervening in the foreign exchange market in the form of dollar sales in order to rein in excessive turbulence in the rupee’s movement versus the US currency.

In line with other emerging market currencies, the Indian rupee has witnessed a phase of sharp volatility since Russia’s invasion of Ukraine on Feb 24, weakening 3.9 per cent versus the US dollar over the period and touching a low of 77.7850/$1 on May 17.

The conflict in Europe has led to a sharp rise in prices of several commodities including crude oil. This in turn has exerted upward pressure on India’s inflation and current account deficit, given that the country imports more than 80 per cent of its oil needs.

According to the report, the recent decline in the RBI’s headline reserves are largely driven by valuation losses and FX swap auctions that the central bank has been carrying out.

In the recent bout of swap auctions, the RBI has been carrying out ‘sell-buy’ auctions, through which it has been selling dollars in order to purchase them at a later date.

“We believe FX reserves will fall further; effective reserves (headline reserves plus RBI’s net outstanding forwards book) are likely to range from USD 620-660bn, while headline FX reserves may stay in the range of USD 550-590bn by end-FY23,” Standard Chartered Bank’s economists wrote.

“These estimated ranges might look low relative to the recent peaks of USD 642bn in headline FX reserves and USD 690bn in effective FX reserves as of October 2021.”

Source Name:-Economic Times
















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