India's forex reserves slip for second week, hit $689.7 billion as RBI steps in to support rupee

By: Team India Tracker

Gold reserves recorded a significant drop of 3.81 billion dollars, bringing their value down to 101.73 billion dollars.

India’s foreign exchange reserves declined by 5.62 billion dollars to 689.73 billion dollars during the week ending October 31, according to data released by the Reserve Bank of India (RBI) on Friday. This marks the second consecutive weekly decline, following a sharper fall of 6.93 billion dollars in the previous week when the reserves stood at 695.36 billion dollars.

Breaking down the components, foreign currency assets (FCAs) which constitute the largest portion of the reserves, fell by 1.96 billion dollars to 564.59 billion dollars. Movements in FCAs reflect not only changes in the value of holdings denominated in currencies such as the euro, pound sterling, and yen but also the effect of their appreciation or depreciation against the US dollar.

Source: Reserve Bank of India

Gold reserves recorded a significant drop of 3.81 billion dollars, bringing their value down to 101.73 billion dollars. The fall in gold holdings may be attributed to changes in international gold prices or valuation adjustments. Special Drawing Rights (SDRs) allocated by the International Monetary Fund (IMF) decreased marginally by 19 million dollars to 18.64 billion dollars. In contrast, India’s reserve position with the IMF increased by 164 million dollars to 4.77 billion dollars during the reporting week.

Despite the recent declines, India continues to hold one of the largest foreign exchange reserve buffers globally. These reserves serve as a crucial safeguard against external economic shocks, currency fluctuations, and volatility in capital flows. Analysts point out that short-term changes in reserves are often influenced by central bank interventions in the forex market, valuation effects, and movements in global commodity and currency markets.

India’s foreign exchange reserves have been shrinking due to a combination of domestic and global factors.  One of the primary factors is the Reserve Bank of India's intervention in the foreign exchange market to keep the value of the rupee stable against the US dollar; when the rupee declines, the RBI sells dollars from its reserves, which lowers the stock's overall value.  Since reserves are held in a variety of currencies, including the euro, pound, and yen, any depreciation of these currencies relative to the dollar reduces the dollar-denominated value of India's holdings. This is another important factor: valuation effects resulting from changes in exchange rates among major currencies.

The value of India's gold reserves has also decreased due to the recent drop in gold prices, which has been responsible for the overall decline. Additionally, the demand for dollars has increased due to outflows of foreign portfolio investments caused by global risk aversion or higher US bond yields, which has prompted the RBI to step in further. Global economic trends, including a strong US dollar and geopolitical tensions, debt repayments, and a growing trade deficit brought on by high import prices, particularly for crude oil have all had an impact. The recent decline in India's foreign exchange reserves can be attributed to a combination of factors, including the RBI's active market management and valuation-related adjustments made in the midst of global financial volatility.

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.