India’s foreign exchange reserve is depleting at a high rate, even relative to the taper tantrum period

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In an effort to avoid an overshoot of the rupee, India’s central bank is depleting its foreign exchange reserves faster than it did during the crisis period in 2013, but economists have noted that a more large pool of reserves could allow it to continue to support the currency.

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

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

The central bank’s holdings of forward dollars fell from $64 billion in April to $22 billion, in line with its intervention in the spot market.

The so-called “taper tantrum”, in which US Treasury yields soared after the Federal Reserve announced it would slow the pace of bond buybacks, put pressure on currencies in developing countries , especially the rupee, pushed the RBI to sell a net amount of $14. billion in bonds from June to September of that year.

India’s foreign exchange reserves hit a record $642 billion in October 2021 before falling 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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