Tuesday, 14 Jan, 2025
India's foreign exchange reserves are still enough to fund about a year's worth of anticipated imports, despite the recent decline. Image Source: IANS
ver the past few weeks, India's foreign exchange reserves have been falling, and the RBI's revaluation and foreign exchange market interventions to help lower currency volatility have been blamed for the decline.
According to the latest data released by the Reserve Bank of India, New Delhi’s forex reserves declined by $4.112 billion to an eight-month low of $640.279 billion during the week ended December 27, 2024. The total kitty has decreased by $8.478 billion to $644.391 billion in the previous week. Over the past few weeks, India's foreign exchange reserves have been falling, and the RBI's revaluation and foreign exchange market interventions to help lower currency volatility have been blamed for the decline. By the end of September, the foreign exchange reserves had grown to an all-time high of $704.885 billion.
According to current data, gold reserves are at $66.268 billion, while foreign currency assets, which make up the majority of the reserves, are valued at $551.921 billion. India's foreign exchange reserves are still enough to fund about a year's worth of anticipated imports, despite the recent decline. In recent years, the nation's reserve management has exhibited erratic trends, with a decrease of $71 billion in 2022 and an addition of almost $58 billion in 2023. Prior to the present drop, the reserves had increased by more than $20 billion in 2024.
Source: Reserve Bank of India
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.
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.
Last week, the value of the native currency dropped by around 0.3 percent to a new low of 85.8075. The rupee has suffered due to worries over India's slowing economy and growing trade imbalance, as well as the strength of the broad-based dollar due to a hawkish shift in the US Federal Reserve's foreign currency stance and expectations regarding the policies of the nation's president-elect, Donald Trump.
To stop the rupee's depreciation and a major collapse, the RBI has probably been selling dollars through state-run banks.
Instead of aiming for certain levels, the RBI's foreign currency management strategy is centered on preserving market stability. The RBI is the central bank in charge of keeping an eye on the foreign exchange markets. The majority of its assets are in reserve currencies, namely the US dollar, with lesser holdings in the euro, Japanese yen, and pound sterling.
The success of the RBI's management approach is demonstrated by the Indian rupee's metamorphosis from one of Asia's most volatile currencies ten years ago to one of its most stable ones today. The central bank has achieved this stability through strategic interventions, buying dollars when the rupee is strong and selling when it is weak. This has increased the appeal of Indian assets to foreign investors.
