India's depleted foreign exchange reserves are likely to drop further, falling to their lowest level in more than two years by end-2022, as the Reserve Bank of India continues to defend the rupee from the mighty dollar's rise, a Reuters poll found.
In a battle that has so far failed to staunch the rupee's fall to a record low against the greenback, the RBI has drawn down its foreign exchange reserves by close to $100 billion, to $545 billion from a peak of $642 billion a year ago, and more is coming.
Those reserves are forecast to fall another $23 billion to $523 billion by the end of this year, according to the median forecast from a September 26-27 Reuters poll of 16 economists. If realised, that would be the lowest level in more than two years.
Forecasts were in a $500-540 billion range.
That suggests the RBI will run down forex reserves at a rate last seen during the global financial crisis of 2008, when they fell more than 20%.
It has already burnt reserves at a much quicker pace than during the taper-tantrum period in 2013 when the U.S. Federal Reserve suddenly cut government bond purchases.
About a decade later, India finds itself in a similar situation. Despite regular interventions via dollar sales and expectations for more, the rupee has depreciated close to 10% against the dollar this year.
"With the latest move that we have seen in the rupee, I expect the RBI to continue intervening to perhaps not try and defend a particular level of the currency, but certainly try and reduce volatility," said Sakshi Gupta, principal economist at HDFC Bank.
"We would see even more interventions in the coming days to deal with the increasing pressure on the rupee and a widening current account deficit, leading to a greater drawdown in the FX reserves by the end of this year."
A few economists in the poll warned overall forex reserves could fall more than their forecasts over the coming year due to a ballooning current account deficit, which was expected to end the fiscal year at its widest in a decade.
Part of the reason for the drawdown is the RBI has lagged the U.S. Federal Reserve with interest rate increases.
The Fed, which has raised rates by 300 basis points from near-zero in March to 3.00%-3.25%, is now expected to do 150 basis points more over the coming months, a separate Reuters poll showed.
For its part, the RBI, which only started raising in May and has increased the repo rate by just 140 basis points, appears almost done. It is forecast to raise by a mere 60 basis points more in this cycle, with 50 due this week.
"The RBI should reduce the pace of intervention sooner rather than later to allow [the rupee] to trade more in line with fundamentals," said Anubhuti Sahay, senior economist at Standard Chartered.
"Our ammunition on FX reserves should remain strong enough, not only for the next six months, but from a two to three years perspective."
