India’s foreign exchange reserves fell to $564 billion, their lowest level since October 2020. The RBI’s latest data shows it fell $6.69 billion in the week ended August 19 after falling $2.24 billion in the previous week. Although foreign exchange reserves are at a two-year low, experts say the situation is far from alarming. Here’s why they say the situation isn’t alarming and what’s causing the decline in reserves.

How Much Have Forex Reserves Fallen?

India’s foreign exchange reserves have fallen to their lowest level since October 2020, falling to $564.05 billion in the week ending August 19, according to the latest RBI data. Reserves have fallen by $67 billion since the Russo-Ukrainian war began in late February. Over the past 26 weeks, India’s forex war chest has seen a 20 week decline.

Foreign Currency Assets (FCA) and Gold Reserves declined for the week ended August 19th. FCA, which is expressed in dollars, reflects the impact of appreciation or depreciation of non-US units such as pounds, euros and yen held in foreign exchange reserves. FCA fell $5.78 billion to $501.22 billion for the week, while India’s gold reserves fell $704 million to $39.91 billion.

Why are foreign exchange reserves declining?

Experts say FX reserves have seen a drop as a result of the Reserve Bank of India’s (RBI) intervention to curb currency volatility. In 2022, the rupee has fallen about 7 percent, which has also made imports more expensive. Also on Monday, the rupee fell 31 paise to an all-time low of 80.15 against the dollar in early trade, before recovering to 79.48 per dollar at 2:03 p.m. Tuesday. The national currency has hit multiple record lows in recent months on capital outflows amid global economic uncertainties.

Vivek Iyer, Partner and Head (Financial Services Risk) at Grant Thornton Bharat Forex said news18.com“India’s foreign exchange reserves have been reduced due to the need to manage currency volatility due to the US Federal Reserve’s policy of tightening interest rates to tame inflation.”

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

Is the situation alarming?

Although India’s foreign exchange reserves have declined in recent months, experts say the situation is by no means alarming. They say the country has a significant amount of foreign exchange reserves.

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

FPIs sold a massive Rs 2.46 lakh crore in Indian stock markets between October 2021 and June 2022. Meanwhile, however, foreign investors have become net investors, pumping Rs 49,250 crore so far in August on improving corporate earnings and macroeconomic fundamentals. They invested Rs 5,000 crore net in July.

Grant Thornton’s Iyer said: “Given that India has a large pool of foreign exchange reserves and the central bank has implemented a series of liberalization measures to ensure a steady flow of foreign exchange, the country’s foreign exchange reserve position is robust.”

Amit Pabari, Managing Director of CR Forex, said RBI has accumulated huge foreign exchange reserves throughout 2020 and early 2021 to protect future uncertainties and hot cash outflows.

“Since the Fed’s tightening message in October 2021, the Indian rupee has traded at an all-time low on the 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, using foreign exchange reserves to control the devaluation movement of the rupee does not mean the country is in bad shape,” Pabari said.

He added that RBI’s sell-side intervention has helped importers make their imports cheaper.

During the latest policy announcement in early August, RBI Governor Shakkanta Das also said, “The financial sector remains well capitalized and India’s foreign exchange reserves provide insurance against global impacts.”

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