By: Yash Gupte
According to figures from the Reserve Bank of India, the country’s forex reserves increased by $6.3 billion to $584.755 billion during the previous week, which concluded on April 7.
India’s foreign exchange reserves jumped sharply by $6.3 billion to $584.75 billion, hitting an over eight nine month high. According to figures from the Reserve Bank of India, the country’s forex reserves increased by $6.3 billion to $584.755 billion during the previous week, which concluded on April 7. The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $4.74 billion to $514.431 billion, according to the most recent statistics from the RBI. In the most recent week, gold reserves increased by $1.496 billion to $46.696 billion. New Delhi’s foreign exchange reserves at the beginning of 2022 stood at $633 billion. The nation’s forex reserves have witnessed a significant decline in past one year due to disruption in global supply chains due to the outbreak of Russia-Ukraine war and a rise in cost of imported goods and the RBI’s recent interventionist policies. The country’s forex reserves had touched an all-time high at $645 billion in October 2021.
The depreciation of the currency was brought on by declining foreign exchange reserves due to the high cost of imported products and the continued tightening of monetary policy by the US Federal Reserve. 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.
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.
Source: Reserve Bank of India
India’s forex reserves went a record low on October 28, 2022 at $531.08 billion. On the other hand, the highest forex reserves in the FY2022-23 were recorded on May 27, 2022 at $601.36 billion. Due to their declining foreign exchange reserves, Sri Lanka and Pakistan, two of India's neighbours, have recently experienced a serious economic crisis. Economists have noted that when nations attempt to defend their economies by selling dollars from their reserves, they fall into a trap and have no private funds left. So, even if the governments wanted to import goods or buy oil, they lacked the necessary funds. At the end of March 2023, Pakistan was left with the forex reserve of only $4.2 billion whereas Sri Lanka’s forex reserves stood at $2.2 billion in February 2023.
According to the Reserve Bank of India, the Special Drawing Rights (SDRs) increased by USD 58 million to USD 18.450 billion. According to data from the apex bank, the nation's reserve position with the IMF increased by USD 13 million to USD 5.178 billion during the reporting week. The rupee ended the reported week 0.3 percent stronger against the US dollar. The Indian rupee fluctuated between 81.8300 and 82.4550 against the dollar during trading.
Abheek Barua, Chief Economist at HDFC Bank said, “If the forex reserves dwindle, the ability to purchase critical things like oil and some food items they don’t produce, reduces, as they don’t have enough dollars to pay for it. Then the country faces shortages of necessary items, inflation, and eventually, the entire economy breaks down, which we have seen in Sri Lanka and Pakistan. As reserves start dropping, a lot of investors started taking money out of such countries.”
Despite rising foreign exchange reserves, economists warned that the level could fall. For example, India's foreign exchange reserves dropped by $70 billion in 2022 as a result of a number of factors, including foreign investors withdrawing their funds and heavy RBI intervention to control currency volatility.