Foreign exchange outflows due to overseas travel by Indians more than doubled from a year earlier to $1.5 billion in August. This may also have been led by the academic year beginning as travel spends tend to surge in the August September. But the August spends are double the comparable August 2019 number of $784 million.
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Though new travelers to the US might have to wait due to visa related issues, tourism is picking up in the rest of the world. “This may be attributed to pent up demand following the opening up of tourism across the world. In a way, the loss of two years is being made up with Europe and South East Asia besides Maldives and Mauritius being destinations” said Madan Sabnavis, chief economist at Bank of Baroda.
Significantly the outflows have surged despite a weakening rupee which has lost more than 6% in value this year ” The cost does not matter here. Besides, Europe has become cheaper due to its decline against the dollar. Trend will continue through till December”
Overall remittances under the liberalized remittance (LRS) which allows resident individuals to remit abroad $250000 a year for current account and some capital account transactions like investment in bonds and equities besides property investment rose by 35% to $2.7 billion in August. In the whole of FY’22 outflows under LRS was $19.6 billion up 54 percent from $12.7 billion in FY’22
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Though the RBI had clamped down on such outflows in 2013 when the limit was capped lower to $75,000 from $125,000 which was subsequently raised again in 2015, indications are that RBI is unlikely to act here this time round. India’s foreign reserves fell by almost $101 billion in January-September 2022 on account of some outflows and dollar sales by the Reserve Bank to defend the value of the currency. But RBI has attributed about two-thirds of the decline to valuation effects.
Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the “taper tantrum” in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress, according to Fitch Ratings. Even at the current levels, India’s reserves are fifth largest in the world.
“Despite the delicate position, we do not think the RBI has run out of ammunition, but its lines of defense are getting weaker,” said Rahul Bajoria, chief India economist, Barclays Capital. “Another flare up in commodity prices, or much stronger growth, could have a bigger impact on the external balance sheet. While we do not see any weakness in reserve adequacy, to ensure macro stability we believe it will be imperative to keep a close eye on the external balance sheet”.