India’s foreign exchange reserves have fallen for the sixth consecutive week, reaching a near three-month low of $675.65 billion as of November 8, according to data released by the Reserve Bank of India (RBI) on Friday. The reserves declined by $6.5 billion during the reporting week and are down $29.2 billion from their record high of $704.89 billion recorded in late September.
The depletion in forex reserves can be attributed to multiple factors. A significant portion of the decline stems from the RBI’s active intervention in the foreign exchange market to stabilize the rupee amid increased volatility. The central bank routinely buys and sells foreign currencies to curb excessive fluctuations and maintain stability in the forex market.
Additionally, fluctuations in the valuation of foreign assets held in the reserves also contribute to the changes. Appreciation or depreciation in the value of these assets, influenced by global economic conditions and market dynamics, directly impacts the overall reserve levels.
During the period in question, the Indian rupee faced significant pressure, weakening to an all-time low of 84.38 against the U.S. dollar. This depreciation was driven by a surge in the dollar’s strength and rising U.S. bond yields following heightened global uncertainties.
The central bank’s strong interventions in the forex market played a crucial role in preventing the rupee from experiencing even deeper losses. Traders noted that these interventions, though costly, helped stabilize the currency in a highly volatile environment.
Despite these efforts, the rupee settled at 84.3950 on Thursday, marking a record low for the currency. The weakening of the rupee has raised concerns about imported inflation and external payment obligations, putting additional pressure on the Indian economy.
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India’s forex reserves comprise four main components:
- Foreign Currency Assets (FCA): The largest component, FCAs are impacted by changes in the valuation of foreign currencies such as the dollar, euro, pound, and yen.
- Gold Reserves: Held by the RBI as part of its asset portfolio.
- Special Drawing Rights (SDRs): Allocations made by the International Monetary Fund (IMF) to its member countries.
- Reserve Tranche Position (RTP): India’s quota with the IMF that can be drawn upon when needed.
The reserves serve as a crucial buffer against external economic shocks, ensuring that the country can meet its international financial obligations and maintain investor confidence.
The decline in forex reserves reflects both global and domestic challenges. On the global front, the strengthening dollar and higher U.S. bond yields have caused capital outflows from emerging markets, including India. Domestically, the rupee’s depreciation has raised concerns about the cost of imports, particularly energy imports, which could exacerbate inflationary pressures.
Moreover, the declining reserves may constrain the central bank’s ability to intervene aggressively in the forex market, posing a challenge to rupee stability in the near term, Reuters.
As global economic uncertainties persist, the RBI faces a delicate balancing act. While it must continue to manage rupee volatility, preserving forex reserves for potential future shocks remains equally critical. The central bank’s measured interventions, combined with fiscal and monetary policies, will be key to navigating these challenges.
India’s foreign exchange reserves have historically played a vital role in maintaining macroeconomic stability, particularly during times of external stress. While the recent decline is notable, the reserves remain robust by historical standards, providing some cushion for the economy to absorb external shocks.
In the coming weeks, the performance of the rupee and forex reserves will remain closely watched, as they reflect both the resilience of the Indian economy and the effectiveness of the central bank’s strategies in managing external risks.