India's Forex Reserves At 2-Year Low: Is The Situation Worrisome? Know What Experts Say

India’s forex reserves declined to their lowest level since October 2020 to $564 billion. The latest RBI data show that it dropped $6.69 billion in the week to August 19, after falling $2.24 billion in the previous week. Though the foreign exchange (forex) reserves are at a two-year-low level, experts say the situation is not at all alarming. Here’s why they say the situation is not alarming and what is causing the fall in the reserves.

How Much The Forex Reserves Have Fallen?

Falling to the lowest level since October 2020, India’s forex reserves have fallen to $564.05 billion in the week to August 19, according to the latest RBI data. The reserves have witnessed a decline of $67 billion since the start of the Russia-Ukraine war in the late-February. Out of the past 26 weeks, India’s forex war chest has witnessed a decline in 20 weeks.

Foreign currency assets (FCA) and the gold reserves witnessed a fall in the week ended August 19. FCA, which is expressed in dollar terms, reflects the effect of appreciation or depreciation of non-US units like pound, euro and yen held in the foreign exchange reserves. FCA fell $5.78 billion to $501.22 billion in the reporting week, while India’s gold reserves declined $704 million to $39.91 billion.

Why Are Forex Reserves Declining?

Experts say that the forex reserves have witnessed a fall as a result of the Reserve Bank of India’s (RBI) intervention to rein the currency volatility. In 2022, the rupee has declined by about 7 per cent, which has also made imports costlier. On Monday also, the rupee depreciated 31 paise to its all-time low of 80.15 against the dollar in early trade before recovering to 79.48 per dollar at 2:03 pm on Tuesday. The domestic currency has hit its record lows multiple times in the past few months due to capital outflows amid global economic uncertainties.

Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat Forex, told news18.com, “India’s forex reserves have reduced as a result of the need to manage the currency volatility on account of the US Fed policy of hardening interest rates to tame inflation.”

Sharing similar views, Anindya Banerjee, vice-president (currency and interest rate derivatives) at Kotak Securities, said, “RBI intervened this year to keep volatility in check in dollar-rupee, as a strong dollar has caused pain around the world.”

Is The Situation Alarming?

Even though India’s forex reserves have seen a decline in the past few months, experts say the situation is not at all alarming. They say the country has a significant amount of forex reserves.

Kotak’s Anindya Banerjee said, “The drop in reserves is not alarming, as the RBI had built a significant amount of reserves during 2020-21. With FPI flows now turning positive, the rupee can see more stability.”

FPIs sold a massive Rs 2.46 lakh crore between October 2021 and June 2022 in the India equity markets. However, now, foreign investors have become net investors and pumped in Rs 49,250 crore so far in August on improvement in corporate earnings and macro fundamentals. They invested a net of Rs 5,000 crore in July.

Grant Thornton’s Iyer said, “Given that India has a large pool of forex reserves and also the central bank has undertaken a number of liberalisation measutes to ensure continuous flow of foreign exchange, the forex reserve position of the country is robust.”

CR Forex Managing Director Amit Pabari said the RBI had built up huge forex reserves during 2020 and early 2021 to safeguard future uncertainty and hot money outflows.

“Since the Fed’s message of tightening in Oct 2021, the Indian rupee was seen trading at an all-time low due to huge FPI outflow and record trade deficit. To keep both ‘value’ and ‘volatility’ in check, the RBI used a combination of balls — spot, forwards, and futures. However, the usage of forex reserves for controlling the rupee’s depreciating move doesn’t mean that the country is in a bad shape,” Pabari said.

He added that the RBI’s selling side intervention has helped importers to have their imports less expensive.

During the last policy announcement in early August, RBI Governor Shaktikanta Das also said, “The financial sector remains well-capitalised and India’s forex reserves provide insurance against global spillovers.”

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