The Indian Forex reserves have fallen to a three-month low of $560 billion, owing to a decline in foreign currency assets and gold reserves. This is according to the latest Reserve Bank of India (RBI) data.
The forex reserves had continuously declined throughout February, but last week they rose by $1.45 billion to $562.4 billion. However, this week, foreign currency assets, the most significant component of foreign exchange reserves, fell by $2.22 billion to $494.8 billion.
Similarly, gold reserves fell by $110 million to $41.92 billion.
Foreign Exchange Reserves Plummet to Lowest Level Since December
On Friday, the Reserve Bank of India’s statistical supplement revealed that the foreign exchange reserves had dropped to $560 billion for the week ending March 10, the lowest since the beginning of December 2022.
This is a decrease of $2.4 billion since the reserves had increased by $1.45 billion in the prior week. According to the RBI data, foreign currency assets, comprising the major component of foreign exchange reserves, decreased by $2.22 billion and stood at $494.8 billion.
At the same time, gold reserves dropped by $110 million to $41.92 billion, and the SDRs (Special Drawing Rights) declined by $53 million to $18.12 billion. The USD/INR spot ended 17 Paise lower at 82.55 due to a risk-on rally in global markets following First Republic Bank’s fund rescue in the US.
In the upcoming week, attention will be focused on the US Fed meeting, with anticipation of raised rates by 25 basis points, resulting in considerable volatility for USD/INR.
Why The Drop In Reserves?
The decline in foreign currency assets and gold reserves results from foreign currency outflows from the Indian market. Foreign investors are withdrawing their investments from the Indian markets due to economic uncertainty.
This outflow of foreign currency has resulted in a decline in the value of the Indian Rupee against major global currencies. This decline has also had an impact on the Forex reserves.
As the value of the Indian Rupee falls, the demand for foreign currency increases, increasing the demand for foreign exchange reserves. That’s why the Forex reserves have been declining in recent times.
However, it is important to note that the decline in the Forex reserves is mainly a result of the outflows of foreign currency from the Indian market and not any other external factors. Therefore, the Indian government and the RBI have taken various measures to combat this problem.
One such measure includes providing liquidity to the market through open market operations and increasing the FDI limits. The Indian government and the RBI have also taken various steps to increase the nation’s Forex reserves.
This includes increasing the limits for overseas investments, allowing more foreign investments into the Indian economy, and providing tax incentives to attract more foreign investments.