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Spending By RBI Exceeds $41 Bn: Report

The report on India's Foreign Exchange reserves by Barclays indicates that while the recent increase in gold import duties and export and export taxes on petroleum products are marginally beneficial, they will not have a substantial impact on India's current account deficit

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RBI

The Reserve Bank of India (RBI) has approximately spent more than USD 41 billion of its reserves, since February 2022, to defend rupees. Due to those factors, as well as the increase in crude prices, the reserves-which would normally cover over a year's worth of imports-will now cover less than 10 months.

The report on India's Foreign Exchange reserves by Barclays indicates that while the recent increase in gold import duties and export and export taxes on petroleum products are marginally beneficial, they will not have a substantial impact on India's current account deficit. 

Barclay's in its report stated that since February, it is estimated the RBI has used more than USD 41 billion of its reserves and further details are likely to emerge in the near future regarding both spot and forward markets.  

In the past few days, the currency has been under intense pressure due to the fast depletion of reserves. For the first time in over 34 months, import cover has declined back to single digits. 

As of  24 June, foreign exchange reserves were USD 593 billion, a gain of USD 2.7 billion over the last week.

According to Barclay's, the RBI will try to regain lost reserves when the flow cycle turns, lowering the chance of the rupee strengthening. In the past, the RBI has followed a similar strategy. In their analysis, foreign reserves protect the economy from financial crises, like the current global financial crisis, which is why the RBI accumulates reserves. The rupee has generally remained stable during the Covid crisis, the report stated.

Based on Barclay's report, the RBI's intervention is needed because imported inflation is a significant issue, and strengthening the rupee is a better alternative than reducing demand with rate hikes. 

Additionally, the rupee is not exorbitant when measured against the real effective exchange rate (REER), which is calculated by comparing the rupee dollar movement with that of other currencies.

The third factor, inflation, does not pose such a threat in India as it does in the West. There are relatively fewer concerns about prices in India than in advanced economies, where inflation is high. 

RBI deputy governor, Michael Patra noted that inflation in India has already peaked, and prices are falling faster than global prices, the report stated.