Dropping Currency Bombs 💥

CHART OF THE WEEK 📈

India’s foreign currency reserves, which comprise mainly of the US dollar (in the form of government bonds), have plummeted by over 14% or US$ 85 billion since April 2022.

The drop is mainly on account of RBI’s intervention to support the Indian rupee. More dollars sold = more the supply of the dollar in the market = dollar weakens.

This logic has led most of the world’s central banks to deplete their foreign exchange reserves and support their own currency, as the dollar strengthens.

According to Bloomberg, global foreign currency reserves declined by US$ 1 trillion (or 8%) this year to US$ 12 trillion - the biggest drop since 2003.

The decline can be attributed to two factors:

1. As the dollar jumped against other reserve currencies (euro, yen, etc.), the dollar value of holdings in these reserve currencies dropped

2. Central banks sold their dollar holdings to fend off currency depreciation

The rupee has outperformed most other Asian currencies this year, thanks to:

• Prompt action by the RBI in using its forex war-chest

• Rate hikes

• Fundamental economic strength

• External Debt as a ratio to GDP being the lowest among its emerging market peers

Despite the magnitude of the drawdown (-18% in a year), the RBI has enough firepower to keep interventions going, while still having enough to comfortably pay for imports.