India's forex reserves to fall to their lowest level in 2 years

India's depleted are likely to drop further, falling to their lowest level in over two years by the end of 2022, as the Reserve Bank of India continues to defend the rupee against the dollar's rise, according to a poll by Reuters.

In a battle that has so far failed to hold the rupee's fall to a record low against the dollar, the rupee has slowed to $545 billion from a peak of $642 billion a year ago, and more is coming.

According to the median forecast from a Sept. 26 -- 27 Reuters poll of 16 economists, those reserves are expected to fall another $23 billion to $523 billion by the end of the year. That would be the lowest level in over two years.

That suggests that the forex reserves will run down at a rate last seen during the 2008 financial crisis, when they fell over 20%.

It's already burning reserves at a much quicker pace than during the taper-tantrum period in 2013 when the U.S. Federal ReserveFederal Reserve cut bond purchases.

India finds itself in a similar situation about a decade later. The rupee has depreciated nearly 10% against the dollar this year and hit a new record low of 81.95 per dollar on Wednesday despite regular interventions via dollar sales and expectations for more.

We're going to see more interventions in the coming days to deal with the increasing pressure on the rupee and a widening current account deficit, leading to a greater drawdown of the FX reserves by the end of the year. A ballooning current account deficit, which was expected to end the fiscal year at its widest in a decade, could cause overall forex reserves to fall more than forecasts over the coming year, according to some economists.

The RBI has lagged the U.S. Federal ReserveFederal Reserve with interest rate hikes as part of the reason for the drawdown.

The Fed, which has raised rates by 300 basis points from near zero in March to 3.00% -- 3.25%, is expected to do 150 basis points more over the coming months, according to a separate Reuters poll.

The RBI, which started hiking in May, has raised the repo rate by just 140 basis points, appears nearly done. It is projected to increase by 60 basis points more in this cycle, with 50 due this week.

Anubhuti Sahay, senior economist at Standard Chartered said that the RBI should reduce the pace of intervention sooner rather than later to allow INR to trade more in line with fundamentals.

Our ammunition on FX reserves should be strong, not only for the next six months, but from a two to three years perspective.