Wednesday, 09 Oct, 2024
By: Yash Gupte
In the most recent week, however the gold reserves depleted by $521million to $46.125 billion. Image Source: IANS
The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $2.204 billion to $516.635 billion, according to the most recent statistics from the RBI.
India’s foreign exchange reserves jumped sharply by $1.65 billion to $586.41 billion, hitting an over eight nine month high. According to figures from the Reserve Bank of India, the country’s forex reserves increased by $1.65 billion to $586.41 billion during the previous week, which concluded on April 14. The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $2.204 billion to $516.635 billion, according to the most recent statistics from the RBI. In the most recent week, however the gold reserves depleted by $521million to $46.125 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) plummeted by $38 million to $18.412 billion. For the reporting week, the rupee fluctuated between 81.77 and 82.15, finishing the week somewhat stronger against the dollar. In the week ending April 21, the rupee's four-week climbing trend came to a halt on Friday when it settled at 82.09. According to data from the apex bank, the nation's reserve position with the IMF increased by $12 million to $5.19 billion during the reporting week.
Anuj Choudhary, Research Analyst at Share khan by BNP Paribas said “India’s forex reserves rose for the second consecutive week. It increased by $ 1.657 billion to $586.412 billion from $584.76 billion on April 14, 2023 amid RBI’s intervention in the forex markets to maintain stability in the domestic currency. Forex reserves rose to the highest levels in 9-months."
Mitul Shah, Head of Research at Reliance Securities said, “The 4QFY23 earnings season will pick up pace in the coming weeks. Meanwhile, mixed signals are emerging from the US, Europe and Chinese economic data. Inflation although declining, continues to run high in US and Europe. Initial signs of recession are emerging from the US jobs data and the TCS and Infosys management commentary. In India, inflation has eased while growth is steadily picking up pace led by accelerated govt capex and PLI investments. Services exports are strong offsetting the slowdown in the merchandise exports and boosting India’s forex reserves. In the coming weeks, investors will parse the earnings outcome of the March quarter and closely follow the management commentary for further cues.”
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.
