Thursday, 05 Dec, 2024
In October of 2021, India’s foreign exchange or forex reserves reached an all-time high of $642 billion. Image Source: IANS
An increase in the forex reserves can either be due to an inflow of US dollars or due to appreciation of foreign assets held in the reserves.
According to the most recent data released by the Reserve Bank of India (RBI), India’s foreign exchange reserves increased for the third consecutive week by $4.549 billion to a new all-time high of $648.151 billion for the week ending on May 17, 2024. Over the course of the week, gold reserves rose by $1.244 billion to $57.195 billion. As per the RBI, the value of the special drawing rights (SDRs) increased by $113 million to $18.168 billion.
Foreign currency assets, a significant portion of the reserves, rose $3.361 billion to $569.009 billion in the week that ended May 10.
In October of 2021, India’s foreign exchange or forex reserves reached an all-time high of $642 billion. The period since then the country’s reserves took a hit as several global developments forced the Reserve Bank of India (RBI) to use the reserves to defend the rupee. But 2023 brought in some relief as the year saw the reserves take on some more weight owing to strong macroeconomic fundamentals amidst a recuperating global economy. On December 01, 2023, RBI reported the country’s forex reserves at $604 billion. It was the second time in 2023 that the reserve crossed the $600 billion mark marking an upward trend in reserves for the third straight week.
Source: Reserve Bank of India
An increase in the forex reserves can either be due to an inflow of US dollars or due to appreciation of foreign assets held in the reserves. On the other hand, a decrease in forex reserves might be due to outflow of USD or depreciation in valuation of assets held in the reserves. Forex reserves also include India's reserve tranche position in the International Monetary Fund and help provide the RBI a cushion to deal with external shocks.
At times of tight monetary policy, investors tend to gravitate towards stable economies like the US in search of higher and more reliable returns. In order to stop a sharp depreciation of the rupee, the RBI often occasionally intervenes in the market through liquidity management, including by selling dollars. To stop the rupee's currency rate from moving inexorably against the dollar, the central bank makes interventions in the spot and futures markets. The RBI has previously said that changes in reserves also result from gains or losses in valuation.
Sanjeev Agrawal, president of PHD Chamber of Commerce and Industry, said, “It is highly appreciable that despite global headwinds, India’s forex reserves are at all-time high levels, on the back of strategic policy reforms and vigil monetary policy. The strengthened foreign reserves, at the level of $648 billion, will propel India’s growth to new highs, bolstering its global standing further. India’s robust foreign exchange reserves will offer the Reserve Bank greater autonomy in managing the country’s currency in light of the geopolitical challenges and fluctuations in global commodity prices.”
Amit Goel, co-founder and chief global strategist at Pace 360, said, “Foreign exchange holdings increased by $4.55 billion, primarily due to the upward revaluation of gold and foreign currency assets.”
Foreign currency maintained by a country's central bank is known as its Forex reserves. It offers protection from unforeseen external shocks. Typically, reserve currencies like the dollar are used to maintain it. The fundamental goal of holding foreign exchange reserves is to preserve confidence in the monetary and exchange rate management policies as well as to preserve currency liquidity to absorb external shocks. Also, having sufficient reserves helps reassure investors in times of extreme uncertainty, such as wars or unrest, portrays a positive image, and reassures trading countries.
