India’s foreign exchange reserves decline to lowest level in nearly 3 months

In July, the yield on the Indian 10-year government bond declined to approximately 7.05%, reaching its lowest level in a month. This drop followed the global trend of falling bond yields, influenced by indications of decelerating inflation and growth in the United States, which tempered the previously held hawkish outlook for the Federal Reserve. Domestic economic indicators displayed a degree of resilience amidst the challenging external conditions, leading to additional investments in Indian bonds, with the latest figures revealing net purchases of $1.1 billion in June. Nonetheless, the lingering risk of inflationary pressures prompted speculation that the RBI would refrain from cutting interest rates in the foreseeable future. Unfavorable weather conditions in Southeast Asia and apprehensions about El Nino further contributed to the rise in food inflation during June, significantly impacting the Indian consumer basket.

The goods trade deficit in India fell to USD 20.13 billion in June 2023, from USD 22.07 billion the previous year, roughly in line with the market expectation of a USD 20.10 billion imbalance. Exports fell 22.0 percent year on year to USD 32.97 billion, the lowest level since October 2022, as external demand remained sluggish due to a recession in the world’s major countries. Meanwhile, imports fell 17.5% to USD 53.10 billion.

The Indian rupee strengthened swiftly from a seven-week high of 82.75 per USD on July 6th, as rising inflationary risks enhanced the case for the RBI to postpone rate reduction. Retail inflation in India rose to 4.8% in June, up from a two-year low of 4.3% the previous month, above market expectations of 4.5% due to a sharp rise in food costs. The events mirrored RBI officials’ concerns that adverse weather and geopolitical tensions could hike food prices, which are an important component of the Indian consumer basket. The rupee has also benefited from significant foreign capital inflows, with recent data revealing that international investors purchased $6.7 billion in Indian stocks in June.

Domestic and global macroeconomic statistics, the trend in global stock markets, monsoon development, the movement of the rupee versus the dollar, and crude oil prices will all influence the bourse trend.

Updated: 30 Jul 2023, 11:27 PM IST