In an effort to avert an overshoot in the rupee, India’s central bank is depleting its foreign exchange reserves more quickly than it did during the taper-tantrum period in 2013, but economists noted that a greater pool of reserves might allow it to continue supporting the currency.
According to information released on Friday, the Reserve Bank of India sold a net amount of $38.8 billion from its foreign exchange reserves between January and July of this year.
According to the most recent statistics available, a net $19 billion was sold in just July alone. Traders reported that intervention continued intense in August when the rupee went below 80 against the dollar.
The central bank’s holdings of forward-priced dollars have decreased from $64 billion in April to $22 billion, along with its intervention in the spot market.
The so-called “taper tantrum,” in which U.S. Treasury yields soared after the Federal Reserve announced it would decrease the pace of bond buybacks, placed pressure on developing nation currencies, especially the rupee, caused the RBI to sell a net of $14 billion in bonds from June to September of that year.
According to Radhika Rao, senior economist at DBS Bank, “India’s foreign reserves started out at a lot greater level in this cycle compared to the taper tantrum, providing a much thicker cushion to withstand global volatility/shocks.”