Why Our Forex Reserves Declined?

In September 2021 the Indian Forex reserve was at a record high of $642.45 billion. Now by 29th April this year, it has declined to $ 597.72 billion i.e, by $ 44.73 billion as per the data released by RBI. The decline in Forex reserves is due to decline in foreign currency assets (FCAs) which includes not only US $ but also non-US units like the euro, pound and yen. 

There has been a massive capital outflow of $ 21.43 billion by foreign portfolio investors (FPIs) since September last year and $ 6.56 billion alone in March this year. The US Federal Reserve started tightening monetary policy and interest rate hikes. The borrowing rate has been zero since 2020 due to Covid-19 pandemic. The US is the world’s biggest economy and the Fed the biggest central bank, and its decisions impact market behaviour around the world. The Fed raised the borrowing cost after 2018 which badly affected the FPIs to pursue their business in India after paying increased cost on borrowing. Hence the FPIs pulled out their money to invest elsewhere with attractive returns on their capital.

Simultaneously the foreign currency assets or FCA that also include non-US units like the euro, pound and yen held in the reserves by RBI also depreciated. All these led to decline in our Forex reserves.

The impact of Russia-Ukraine war on Indian economy is also one of the factors to be considered seriously for anticipatory measures. The rupee is under pressure: it has fallen 3.5% against the dollar in 2022 and touched record lows. The reason is two-fold: One, the Russia-Ukraine war, and two, the expected hike in US interest rates.

The rupee has slipped 76.92 to a $. It is bad for imports. We will have to pay more in $ than before. If the rupee slides further, the RBI will be forced to intervene in the forex market by selling dollars from its forex kitty, putting more pressure on the total forex reserves.

Anyway, the RBI must devise ways to maintain our Forex reserves at $ 600 billion level by all means.

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