B rent crude prices hit a 14-year high of $140 as the Russian-Ukrainian war intensified। Since India imports about 80 per cent of its domestic requirements, higher crude oil prices would have also increased the need for dollars.
March 11, Indias foreign exchange reserves declined by USD 9.64 billion to USD 622.275 billion during the week ending 2022, Besides, sustained selling by foreign portfolio investors (FPIs), easing crude oil prices and capital outflows weighed on the rupee. This is the biggest fall in reserves in nearly two years since the $11.98 billion fall in the week ended March 20, 2020, when the COVID-19 pandemic hit India and FPIs pulled out money.
Why is the stock down?
When the rupee fell below the 77 level and crude oil prices soared, the Reserve Bank of India (RBI) sold dollars to prevent further depreciation in the price. RBI intervention selling dollars through PSU banks began when the rupee crossed the 76-mark to 77 points. The RBI sold $5.135 billion to banks on March 8 and agreed to buy back the dollar at the end of the swap-disposal period। When the central bank sells dollars, it withdraws equal amounts in the rupee, reducing the rupee's liquidity in the system. The rupee, which had touched 77 against the dollar on March 8, was strengthened by dollar inflows in the market। The rupee had closed at 75.80/81 against the US dollar on Thursday (March 17).
What was the reason for the pressure on the rupee?
Putting heavy pressure on the rupee, foreign investors pulled out Rs 41,617 crore in March, after outflows of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, FPIs have pulled out Rs 225,649 crore (excluding FPIs investment in IPOs) since October 1, 2021, mainly due to the fear of interest rate hike by the US Federal Reserve.
In addition, Brent crude prices hit a 14-year high of $140 as the Russian-Ukrainian war intensified. Since India imports about 80 per cent of its domestic requirements, higher crude oil prices would have also increased the need for dollars.
Why has foreign exchange assets declined?
The main components of the forex reserves are the International Monetary Funds foreign currency assets (FCAs), gold holdings and SDRs (special drawing rights)। The RBI sold dollars from the FCA kitty held by global central banks, foreign banks and foreign securities to strengthen the rupee.
In the week ended March 11, foreign currency assets (FCAs) fell by $11.108 billion to $554.359 billion, according to RBI data. Foreign currency assets include the effect of appreciation or depreciation of dollars and non-US entities.
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