India’s forex reserves rebounding after 2022 decline?

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The subject of Forex (Foreign Exchange) is rarely too far away from the money news headlines, being a subject of interest both to individual traders assessing sites such as tradingforexsites.com, and the general population at large.

In India, the Forex subject has been appearing with even greater regularity than usual over the past 12 months or so, with the nation’s Forex Reserves experiencing something of a rollercoaster ride.

What are Forex Reserves?

To the uninitiated, Forex reserves – also known as Foreign Exchange reserves – are assets held on reserve by a monetary authority such as a Central Bank, with their primary purpose being to provide backup/insurance should the national currency – in India’s case the Rupee – suddenly decrease in value or become completely insolvent.

In addition to this backup function, the levels of reserve assets can also be used to assist in balancing the payments of the country, influence the foreign exchange rates, and maintain a general level of confidence in the financial markets system.

These reserves most commonly take the form of gold reserves, bonds, special drawing rights, treasury bills, government securities and foreign exchange currency – notably the US dollar, British Pound, Euro, Japanese Yen, and Chinese Yuan. In India, the lion’s share of the reserves usually consists of various foreign currencies, with gold reserves coming next.

The management of the nation’s Forex Reserves falls under the remit of the Reserve Bank of India (RBI). This function is outlined in the preamble to the RBI Act, 1934, which reads, “ to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India”.

In general, higher levels of Foreign Reserves are preferred, with related benefits including the strengthening of the Rupee against the Dollar, and security in terms of Foreign Exchange requirements, and national debt obligations.

What Happened in 2022?

The year may have ended on a high, with the Forex reserves increasing by a €44m in the week ending 30th December 2022, taking the total value of the reserves to $562.85 billion. This rise was however but a drop in the ocean in relation to the overall trend for 2022 – with the year as a whole seeing the levels of reserves drop by $70.1 billion.

Why did the Reserves Drop?

A portion of the decline can be attributed to the RBI’s intervention in the currency markets, in an effort to stabilise the Rupee and limit volatility.

In addition to this, the US Dollar assets of the reserves were hit by a drop in the value of the Dollar. This process began when the US Federal Reserve began tightening its monetary policy in September of 2021 and was exacerbated by the war between Russia and Ukraine which put further pressure on the dollar.

On top of all this, the price of gold also declined over this period, diminishing the value of the gold-backed Foreign Exchange Reserves.

The decline in the reserve levels had a knock-on effect on the Rupee, with the Indian currency dropping to all-time low values on numerous occasions, showing an overall decline of close to 12% during 2022. A concerning trend, but recent evidence suggests that the reserve levels, at least, may be rebounding.

Solid Start to 2023

In the week ending the 13th of January, the level of the nation’s Forex reserves increased by an impressive $10.417 billion, taking the overall value to $572 billion from $561.53 billion in the space of just seven days.

That level represents the highest total since August 2022 when the Forex Reserves stood at a slightly higher $572.98 billion. The growth was also the biggest single week increase since the week ending 2nd of December 2022.

An increase in the value of foreign currency assets was the prime driver for this growth – increasing by $9.078 billion over the week. The improving gold price contributed $1.106 billion.

Soumyajit Niyogi, director at India Ratings & Research outlined the potential contributing factors to this recent improvement when stating, “The overall balance of payments has improved and so have valuations. There were likely some dollar purchases by the RBI. That can be seen from the improvement in the liquidity situation in the banking system,”

Encouraging as this pattern is, the reserves are nevertheless still some way below the $633 billion level of early 2022, or the all-time high of $645 billion reported in October of 2021.