India’s foreign exchange reserves, which measure the country’s ability to pay for imports and service its debt, fell by $7.27 billion to $594.88 billion for the week ended August 18, according to the data released by the Reserve Bank of India (RBI) on Friday.
The decline was mainly due to a decrease in foreign currency assets and gold reserves, which are the two major components of the forex reserves. Foreign currency assets, which include the effect of appreciation or depreciation of non-US currencies like the euro, pound and yen, dropped by $6.61 billion to $527.79 billion. Gold reserves, which reflect the value of the country’s holdings of the precious metal, fell by $515 million to $43.82 billion.
The other two components of the forex reserves, the Special Drawing Rights (SDRs) and the reserve position with the International Monetary Fund (IMF), also declined marginally. SDRs, which are international reserve assets created by the IMF, decreased by $119 million to $18.21 billion. The reserve position with the IMF, which represents the country’s quota or share in the fund, was down by $25 million to $5.07 billion.
RBI Uses Forex Reserves to Defend Rupee Amid Global Pressures
The fall in forex reserves comes after a period of steady accumulation, as the RBI intervened in the foreign exchange market to prevent excessive appreciation of the rupee and build a buffer against external shocks. The country’s forex kitty reached an all-time high of $645 billion in October 2021.
However, since then, the RBI has been using the forex reserves to defend the rupee amid pressures caused by global developments such as rising US interest rates, tapering of bond purchases by the US Federal Reserve, surging oil prices and geopolitical tensions. The rupee has depreciated by about 4% against the US dollar since October 2021 and closed at 74.34 on Friday.
The RBI governor Shaktikanta Das has said that the central bank will continue to use its forex reserves judiciously and not hesitate to intervene in the market when necessary to maintain orderly conditions and curb excessive volatility. He has also assured that India has adequate forex reserves to meet any contingency and that there is no cause for concern or panic.
Forex Reserves Provide Cushion Against External Vulnerabilities
Despite the recent decline, India’s forex reserves are still among the highest in the world and provide a cushion against external vulnerabilities such as sudden capital outflows, currency fluctuations and import shocks. According to the RBI’s latest annual report, India’s forex reserves cover about 18 months of imports and 101% of its external debt as of March 2021.
The RBI has also been diversifying its forex reserves portfolio by increasing its exposure to non-dollar currencies and gold. The share of non-dollar currencies in foreign currency assets rose from 23.4% in March 2020 to 26.5% in March 2021, while the share of gold increased from 6.7% to 7%. The RBI has also joined other central banks in adding digital currencies to its research agenda and exploring their implications for monetary policy and financial stability.
The RBI has said that it will continue to monitor and manage the forex reserves prudently and dynamically, taking into account the changing macroeconomic environment and global financial conditions. The RBI has also emphasized that forex reserves are not a source of revenue or profit for the central bank, but a means of ensuring financial stability and confidence in the economy.