India’s Forex Reserves See Sharpest Weekly Drop on Record

India’s Forex Reserves See Sharpest Weekly Drop on Record

Sub : Eco

Sec: Externals sector

• Record Weekly Drop:
  • Forex reserves fell by $17.8 billion during the week of November 15, marking the largest weekly drop on record since 1998.
  • Reserves reached a four-month low of $657.89 billion.
• Factors Contributing to Decline:
  • Strengthening Dollar: The U.S. election verdict led to a stronger dollar and higher U.S. bond yields.
  • RBI’s Dollar Sales: The Reserve Bank of India (RBI) sold approximately $7.2 billion to stabilize the rupee.

Rupee Under Pressure:

• Depreciation:
  • The rupee hit an all-time low of 84.50 during the week, before settling at 84.44.
  • Persistent foreign outflows have contributed to its decline.

Resilience Despite Decline:

• Intervention by RBI:
  • Frequent interventions prevented extreme volatility in the currency market.
• Adequate Reserves:
  • Forex reserves provide an 11-month import cover, meeting external adequacy requirements.
  • Expected revival in foreign inflows and manageable current account deficit could raise reserves to $675–685 billion by March 2025, according to experts.

Conclusion:

India’s foreign exchange reserves have faced significant pressure due to global and domestic factors. However, robust reserves and expected inflows offer optimism for stabilization in the coming months.

Forex Reserves

• Forex reserves are foreign currency assets held by a country’s central bank to ensure financial stability and support monetary policies. These reserves primarily include foreign currencies but can also consist of assets like gold and Special Drawing Rights (SDRs).
• India’s forex reserves are diversified into foreign currency assets, gold, SDRs, and its IMF reserve position. These reserves are used to stabilize the rupee during volatility in global markets.

Components:

• Foreign Currency Assets (FCA):
  • The largest component, consisting of investments in foreign currencies (mainly US dollars).
• Gold Reserves:
  • Held as a financial asset by central banks to diversify reserves.
• Special Drawing Rights (SDRs):
  • A reserve asset allocated by the IMF to member countries.
• Reserve Position with IMF:
  • The portion of the country’s quota maintained with the International Monetary Fund.

Special Drawing Rights (SDRs)

Definition: International reserve assets created by the International Monetary Fund (IMF) to supplement member countries’ official reserves.

Not a Currency: SDRs represent potential claims on the freely usable currencies of IMF members.

Key Features:

• Valuation: SDRs are valued based on a basket of five major currencies:
  • US Dollar
  • Euro
  • Japanese Yen
  • Chinese Yuan
  • British Pound Sterling
• Interest Rate: The SDR interest rate (SDRi) is paid on members’ SDR holdings and reflects global financial market conditions.