India spending forex stocks more rapidly than during taper tantrum

Mumbai: India's central bank is using up its foreign exchange reserves at a quicker pace than during the taper-tantrum period in 2013 as it tries to prevent an overshoot in the rupee, but a larger pool of reserves may allow it to support the currency for some more time, economists said.

The Reserve Bank of India has sold a net of $38.8 billion from its forex reserves between January and July this year, data released on Friday showed.

A net of $19 billion was sold in July alone, the most recent data available, and intervention remained heavy in August when the rupee fell below 80 against the dollar, traders said.

Alongside its intervention in the spot market, the central bank's forward dollar holdings have fallen to $22 billion from $64 billion in April.

In 2013, the RBI had sold a net of $14 billion in the June to September period after the so-called taper tantrum-when U.S. Treasury yields spiked after the Federal Reserve said it would slow its pace of bond buybacks-had put pressure on emerging economy currencies, including the rupee, Reuters reported.

"The starting point of India's foreign reserves was at a much higher level in this cycle compared to the taper tantrum, providing a much thicker cushion to withstand global volatility/ shocks," said Radhika Rao, senior economist at DBS Bank.

India's forex reserves have fallen to a two-year low of $550 billion from a peak of $642 billion in October 2021. Apart from actual dollar sales, reserves are also impacted by a drop in major currencies like the euro and yen against the greenback and a lower valuation of dollar-denominated securities.