Wednesday, 09 Oct, 2024
By: Yash Gupte
The reserves experienced an astounding $12.74 billion boost from the previous week, which is the greatest weekly gain in the last four months. Image Source: IANS
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.
India's foreign exchange reserves have passed the $600 billion threshold for the first time since May 2022, marking an important milestone. The remarkable $609 billion level of foreign exchange reserves as of July 14 was a 15-month high. This outstanding accomplishment has occurred despite a background of rising dollar inflows into the national economy. The reserves experienced an astounding $12.74 billion boost from the previous week, which is the greatest weekly gain in the last four months. There are two main causes for this increase. First, the Reserve Bank of India (RBI) increased the amount of US government bonds it held, which helped to raise reserves. The strengthening of the overall value of India's foreign exchange holdings was significantly aided by the appreciation of non-dollar currencies.
The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $11.2 billion to $540.17 billion, according to the most recent statistics from the RBI. In the most recent week, the gold reserves also increased by $1.14 billion to $45.2 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. However, the current increase in forex reserves hints a recovery. The country’s forex reserves had touched an all-time high at $645 billion in October 2021.
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.
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) also increased by $249 million from $18.235 billion to $18.484 billion.
Gaura Gupta Sen, Indian Economist at IDFC First Bank said, “A major portion of the week-on-week jump in Forex reserves is driven by revaluation gains due to dollar weakness and reduction in U.S. Treasury yields.”
Talking about the forex reserves of India’s neighbouring countries, according to the State Bank of Pakistan, the country’s forex reserves stands at $14.065 billion as of July 14, 2023. Pakistan had a foreign exchange reserve of $24.397 billion in the financial year 2020-21. This shows a serious decline in Pakistan’s forex reserves. Talking about India’s eastern neighbour Bangladesh, the country’s foreign exchange reserves as of July 14, 2023 stands at $23.56 billion. Coming over to Sri Lanka, the island nation’s forex reserves were recorded at $3.5 billion in June 2023.
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.”
According to experts, India's foreign exchange reserves are currently at a comfortable level thanks to the Reserve Bank of India's sustained involvement and the prospect of less unpredictable revaluation fluctuations. Utilising the rupee's rebound, the RBI has begun restocking reserves since October 2022. According to its records, the central bank purchased goods worth more than $8 billion on the spot market in November and December. The RBI also makes purchases of dollars in the forward market. The latest month for which data is available is February, and its net outstanding forward dollar purchases increased to $20.4 billion from $241 million in October.
