Thursday, 11 Sep, 2025
By: Sutanu Guru
According to the latest data released by the Reserve Bank of India on September 16, 2022, the total forex reserves in India was $ 551 billion, down from a peak of $ 640 billion in October 2021.
In less than a year, the dollar denominated foreign exchange reserves of India have fallen by about $ 90 billion. According to the latest data released by the Reserve Bank of India on September 16, 2022, the total forex reserves in India was $ 551 billion, down from a peak of $ 640 billion in October 2021. To put things in perspective, the finance minister of Pakistan would have perhaps shed tears of joy if something similar happened in his country. That is because the drop in India’s forex reserves is more than 10 times the total forex reserves of that country. Even after the precipitous $ 90 billion drop, the forex reserves of India are 70 times that of Pakistan. But such comparisons can satisfy a set of Indians suffused with jingoism. For serious commentators and policy makers, the real question to be asked and answered is: is the drop precipitous enough to set alarm bells ringing in RBI and the finance ministry?
The answer will depend on whether you are a glass half empty or half full person. When forex reserves were at their peak last year, they were enough to pay for 11 months of imports. Now, they can pay for 7 months of imports and the forex reserves will probably continue to decline for some time. The situation is far from grim, like in 1991 when forex reserves in India could pay for barely two weeks of imports. But there is a worry. There are three reasons for the concern. First, is the ballooning trade deficit. Thanks to a near recession in the global economy, the spectacular run of exports from India (a near 40% growth in 2021-22) seems to have come to a grinding halt. But since the domestic economy is ticking along nicely, the import bill continues to swell. In August 2022, exports grew 1.6% on a year to year basis to be close to $ 34 billion. Imports grew almost 38% to $ 62 billion. Consequentially, trade deficit more than doubled to touch $ 28 billion. In fact, the trade deficit during April-August 2022 at $ 124.5 billon is significantly higher than $ 54.7 billion in April-August, 2021. A larger dollar outflow is inevitable.
The second is the sustained rise in the value of the US dollar against almost all major currencies. This has been pronounced since Russia invaded Ukrainian on February 24, 2022. From hovering around Rs 75, the value of the Rupee has fallen to Rs 80 against the dollar. In fact, as the chart shows, the real decline in India’s forex reserves started after the Russian invasion. Quite simply, the RBI has thrown tens of bills of dollars in the open market to arrest the slide of the Rupee. It has publicly admitted as much. In the near term, this pressure will perhaps not ease and forex reserves could decline further. The third reason is the volatility in stock markets. FIIs have a tendency to dump stocks in emerging markets during a crisis and flee to “safer” havens like the US. They did that with India too. At the moment, FIIs are back in India, but remain unpredictable.
So there are reasons to be worried. What about alarm bells? That is not likely as all the three reasons are cyclical and not structural in nature. A 1991 like crisis is as possible as Narendra Modi joining the Congress.
