After eight months when India’s forex reserve touched a record high of $642.54 billion in September 2021, but after that, it was falling and now stands below the $600 billion mark amid capital outflow due to the pandemic and strengthening dollar.
RBI released a statistical supplement on its website which is updated on weekly basis. On 6th May our forex reserve stood at $597 billion which on 29th April was above $600 billion. Within a week a sharp decline of $2.6 billion was quite astonishing.
If we compare the present with Sept. 2021 then we can observe our forex reserves are reduced by $44.73 billion. This decline was on account of a fall in Foreign Currency Asset (FCA), which is a major component of the overall reserve.
Currently, FCA stands at $532 billion this includes the effect of appreciation or depreciation of non-US units like euros, pounds, and yen held in reserve.
What Caused the Decline?
One of the major reasons is the capital outflow by FPIs (Foreign Portfolio Investors) who’ve pulled out $21.43 billion since September 2021. This happened because US Federal Reserve started monetary policy tightening and interest rate hikes.
The biggest fall was witnessed in March when FPIs pulled $6.56 billion. The demand for the dollar also remained high as the Russia-Ukraine war led to a spike in oil and commodity prices apart from the depreciation of other countries.
Another reason is the ongoing Russia-Ukraine war which has depreciated the value of rupees.
Currently, $1= 76.96 Indian Rupee, and when Rupee gets weak RBI tries to control it by selling dollars from the forex reserve. This increases the supply of dollars in the market and fills the empty spaces.
Where is the Forex Stored?
The FCA’s comprise multi-currency assets that are held in multi-asset portfolios as per the existing norms, which confirms the best international practices followed.
As of Sept. 2021, $383.74 billion was invested in foreign securities, and $147.86 billion was deposited with other central banks and BIS. The balance of $42 billion comprises deposits with a commercial bank overseas.
RBIs gold holdings were 743.84 tons and the value of this holding has gone up by $4 billion leading it to $41.60 billion as of 29th April 2022.
Impact on Indian Currency
On Friday, the rupee slumped 57 paise and touched a low of 76.96, which is just below the all-time low of 76.97. If the rupee slides further, RBI will be forced to intervene in the forex market by selling dollars from its forex kitty, putting pressure on the total forex reserve.
RBI will try its best to maintain forex reserves of over $600 billion. If RBI gives preference to sustaining the forex reserves level there could be some rupee depreciation on the horizon.
According to some reports, IMF suggests India’s GDP hit $5 trillion in FY29 and $1 will be equal to 94 rupees.
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Published By: Aman Gupta
Edited By: Vanshika Sahu
