India's Forex Reserves drop by $10.7 billion amid global currency fluctuations

Mumbai: India’s foreign exchange reserves saw a significant decline of 10.7 billion dollars, bringing the total reserves down to 690 billion dollars  as of October 11, 2024, according to the latest data released by the Reserve Bank of India (RBI) on 18th October, friday. The drop in reserves comes at a time when global markets are facing turbulence, with fluctuating currency values and geopolitical uncertainties impacting financial stability across nations.

The Weekly Statistical Supplement issued by the RBI highlights that the decline in reserves was primarily driven by a fall in Foreign Currency Assets (FCAs), which are a major component of India's forex reserves. FCAs fell by 10.5 billion dollars, bringing their total to 602 billion dollars. FCAs are composed of assets like government bonds and currency holdings in non-US currencies such as the euro, British pound, and Japanese yen. When these currencies depreciate relative to the US dollar, the value of India’s foreign currency reserves is negatively impacted when expressed in dollar terms.

Gold reserves, another significant component of the forex reserves, also witnessed a decrease, falling by 98 million dollars to 65.6 billion dollars. Gold serves as a strategic asset for central banks, and fluctuations in global gold prices can affect reserve levels. Additionally, India's holdings in Special Drawing Rights (SDRs) — an international reserve asset created by the International Monetary Fund (IMF) — saw a dip of 86 million dollars, leaving them at 18.3 billion dollars.
The reserve position in the IMF also contracted by 20 million dollars, now standing at 4.3 billion dollars. The IMF reserve position allows India to borrow foreign currencies in case of balance of payment needs, providing an extra layer of financial security during economic shocks. However, the contraction in this segment reflects the broader decline in India's reserve holdings.

RBI’s market intervention strategy

The Reserve Bank of India, as part of its broader mandate to maintain financial stability, actively intervenes in the foreign exchange market. From time to time, the central bank sells dollars in the open market to manage liquidity and prevent sharp depreciation of the Indian rupee. The RBI’s interventions aim to maintain orderly market conditions, particularly when there is excessive volatility in the exchange rate.

However, the RBI does not target any specific exchange rate level for the rupee. Instead, its primary objective is to curb extreme fluctuations, allowing market forces to determine the currency's value. This approach enables the RBI to preserve its forex reserves while stabilising the domestic currency against global pressures.
Analysts believe that recent market conditions, including a strengthening of the US dollar and rising global interest rates, have contributed to the decline in India’s reserves. The dollar's appreciation relative to other currencies has exerted pressure on emerging markets like India, leading to capital outflows and a corresponding decrease in reserves.

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Impact on the Indian economy
The decline in forex reserves could have several implications for India’s economic outlook. A robust forex reserve is crucial for maintaining investor confidence, as it ensures that the country can meet its external obligations and manage periods of economic uncertainty. Lower reserves may limit the RBI’s ability to intervene in the currency markets and could lead to further depreciation of the rupee if global pressures intensify.

At the same time, a dip in reserves can also impact India’s import capabilities, particularly in terms of energy resources such as oil and gas, which are priced in US dollars. As reserves dwindle, the cost of importing essential goods may rise, leading to inflationary pressures within the domestic economy.
Despite the dip, India’s reserves remain among the highest in the world, and the RBI has indicated that it continues to closely monitor the situation. According to the central bank, India’s external position remains resilient, and the reserves provide a sufficient buffer against external shocks.