Drop in India's forex reserves worrisome as inflows slow down: Economists

India's forex reserves declined to $553.1 bn in the week ended Sept. 2, their lowest since Oct. 2020 and down by $8 bn from the previous week, RBI data showed on Friday

India's foreign exchange reserves dropping to a two-year low is concerning for the economy as the pace of foreign inflows into the country's markets eases amid global monetary policy tightening, economists said on Monday.

India's FX reserves declined to $553.1 billion in the week ended Sept. 2, their lowest since Oct. 2020 and down by $8 billion from the previous week, Reserve Bank of India (RBI) data showed on Friday.

It was the biggest drawdown in reserves since early July, which analysts attributed to the central bank proactively intervening in currency markets to help the rupee after it hit a record low of 80.12 against a surging dollar that week.

"Situation is getting worrisome because the Federal Reserve and rest of the central banks continue to act aggressively and inflows into Indian markets in September are not as robust as August's," said Anitha Rangan, economist with Equirus, adding that imports are rising while the pool of reserves is declining.

Foreign investors have bought around $700 million worth of Indian equities so far this month, after having poured in $6.5 billion in August.

On the debt side, Rangan said drawing inflows would be a challenge as the interest rate differential between India and the developed markets such as the United States could widen. The pace of rate hikes in the United States and Europe is expected to be steeper than in India, where the gap between targeted inflation and actual inflation is narrower.

Vivek Kumar, an economist at QuantEco Research, pointed out that not all of the decline in reserves was due to the RBI spot intervention.

Foreign exchange mark-to-market and maturity of forward contracts would have likely contributed to the fall, Kumar said.

The RBI has been regularly dipping into the reserves to shield the rupee from the volatility fuelled by U.S. Fed's rate hikes and high commodity prices.