India’s forex reserves rise to one year high; almost hit $600 billion

By: Yash Gupte

The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $3.577 billion to $529.598 billion, according to the most recent statistics from the RBI.

India’s foreign exchange reserves jumped sharply for the third week in a row, reaching $599.53 billion on May 12, 2023. The forex reserves increased sharply by $3.55 billion to reach $599.53 billion, hitting an over one year high. According to figures from the Reserve Bank of India, the country’s forex reserves increased by $3.55 billion to $599.53 billion during the previous week, which concluded on May 12. The largest component of the foreign exchange reserves, India's foreign currency assets, increased by $3.577 billion to $529.598 billion, according to the most recent statistics from the RBI. In the most recent week, the gold reserves also increased by $38 million to $46.353 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.

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.

Additionally, the RBI's market interventions to protect the weakening rupee from an increasing dollar caused the foreign exchange reserves to decline significantly.

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 $204 million to $18.447 billion. Notably, the Indian rupee experienced its worst week since mid-March on Friday as the US dollar gained momentum. In contrast to the previous session's print of 82.09 per dollar, the rupee closed at 82.225 per dollar. Due to weak Asian rivals, the performance of the rupee was hampered. The tone was set by lukewarm Chinese economic statistics, worries about the state of the US government's finances, and uncertainty around interest rates.

Jateen Trivedi, VP Research Analyst at LKP Securities said, "Based on the given information, the rupee has been trading weak with a range of 82.08-82.22, hovering around 82.15. The US debt crisis has added pressure on economies and may have contributed to the rupee's weakness. Despite attempts to cross 82.00, the rupee has failed and is awaiting the outcome of the Karnataka election results, which will be keenly observed by market participants."

Talking about the forex reserves of India’s neighbouring countries, according to the State Bank of Pakistan, the country’s forex reserves stands at $9.456 billion as of April 30, 2023. Pakistan had a forex reserves worth $14.232 billion in August 2022. This shows a serious decline in Pakistan’s forex reserves. Coming over to India’s eastern neighbour, Bangladesh, as of April 30, 2023, Bangladesh has forex reserves worth $30.965 billion. Bangladesh has also witnessed a decline in its forex reserves as Dhaka had forex reserves worth $39.599 billion in July 2022. Talking about Sri Lanka, in April, the island nation had forex reserves worth $2.7 billion.

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.

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.”