Rupee battered despite over $12.5 bn drop in forex reserves

Notwithstanding a USD 12.6 billion, or 4.3 percent, fall in forex reserves since the beginning of the current fiscal year - much of which could have been used to contain rupee volatility - the currency still remains battered with a loss of 9.7 percent.

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On Friday, however, the rupee breached a nine-week long losing streak against the US dollar.

According some analysts, who did not want to be named, a large part of the reserves could have been used to check the volatility in the forex market.

While the rupee lost 9.7 percent between April 2 (54.25 to the US dollar) and July 12, when it closed at 59.57, during the same period (between the weeks to April 5 and July 5), the forex reserves plunged by 4.28 percent or USD 12.48 billion to reach USD 280.17 billion from USD 292.65 billion.

The analysts said this indicates the apex bank's efforts at containing the rupee volatility have not met with the desired results.

Meanwhile, according to Bank of America-Merrill Lynch India chief economist Indranil Sen Gupta, the Reserve Bank (RBI), whose official position is not targetting a level for the rupee but to contain volatility in the forex market, still has a leg-room of around USD 20 billion to support the rupee.

Significantly, this USD 12.5 billion plunge is a not even half the dollars that the RBI had sold between July 2012 and July 2011, as in that period the depletion in the forex reserves was a whopping USD 27 billion, to support the rupee.

According to the latest forex reserves data released by RBI on Friday, the reserves have plunged by a whopping USD 4.478 billion to USD 280.17 billion in the week to July 5.

Similarly, foreign currency assets, too, fell by USD 3.175 billion to USD 252.1 billion, according to the RBI data during the reporting week.

Out of this USD 12.5 billion forex reserves depletion, majority of it or USD 10.5 billion were sold during the past three weeks alone, when every week the rupee has been breaching new psychological levels, with July 8 begin the worst day as it closed at 61.20 against the dollar.

The analysts said the plunge has not only made the import cover whipsawed to just six months, it has also made the overall balance of payment position vulnerable as the country has to shell out a whopping USD 170 billion to pay back the short-term external debt over the next 12 months.

While the forex reserves at USD 280.17 billion, as of July 5, are way off the peak of USD 320 billion in February 2011, it is down USD 10 billion year-on-year, according to the RBI data.

The dollar has been on a gaining spree since the middle of May after the US Fed chairman hinted at turning the tap on easy liquidity by the end of the calender year, which led to scramble among the foreign investors who made a beeline to exist emerging market.

The rupee is the worst hit amongst the Asian currencies as its problems have been compounded by weak domestic situations like high current account deficit and inflation. So far this year, FIIs sold over USD 8.5 billion worth domestic debt and equities.

While headline inflation has been ebbing in the past three months, retail inflation has been stubbornly high and still rising.

Current account deficit too is at a high of 4.8 percent of GDP as of last fiscal year.

The latest government data showed that costly vegetables, oil and other imported items pushed retail inflation to 9.87 percent in June, up from 9.31 percent in May.

Food inflation in June also rose to 11.84 per cent from 10.65 percent in the previous month, according to the official data.

The wholesale price index-based inflation was at three-and-a-half year low of 4.7 percent in May. The data for June is scheduled to be released on Monday.

Faced with the continuing outflow of foreign funds and deteriorating current account deficit, the chief economic advisor to the finance minister Raghuram Rajan last Friday discussed the possibility of floating sovereign bonds to shore up forex reserves.

The government has been talking of various measures to increase inflows, including launching sovereign bonds similar to the India Development Bonds issued in 1991 and Resurgent India Bonds in 1998.

Analysts said that to tide over the balance of payments crisis, the government in 1991 issued India Development Bonds and raised USD 1.6 billion.

In 1998, it launched the 'Resurgent India Bonds' soon after the nuclear tests and sanctions that followed. The scheme raised USD 4.2 billion, they added.

Two years later in 2001, the government rolled out "India Millennium Deposits" on the back of rising fuel prices and slowing capital flows. It was able to garner USD 5.5 billion.