High Asset

Explained: Why India’s forex reserves fell by nearly $10 billion, highest in 2 years

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India’s foreign exchange reserves fell by $9.64 billion to $622.275 billion during the week ending March 11, 2022, as the rupee depreciated against the US dollar amid the rise in crude oil prices and capital outflows due to sustained selling by foreign portfolio investors (FPIs). This is the biggest fall in reserves in nearly two years after it plunged by $11.98 billion during the week ending March 20, 2020, when the Covid-19 pandemic hit India and FPIs pulled out funds.

Why have the reserves declined?

When the rupee fell below the 77 level after the Russia-Ukraine war intensified and crude oil prices flared up, the Reserve Bank of India (RBI) sold dollars to prevent a further slide in value. The RBI’s intervention — dollar sales through PSU banks — started when the rupee crossed the 76-level and headed to the 77-mark. The RBI sold $5.135 billion to banks on March 8 and simultaneously agreed to buy back the dollars at the end of the swap-settlement period. When the central bank sells dollars, it takes out an equivalent amount in rupees, thus reducing the rupee liquidity in the system. Dollar inflow into the market strengthened the rupee which hit the 77-mark against the dollar on March 8. On March 17, the rupee spurted by 41 paise to close at 75.80/81 against the US dollar on Thursday (March 17).

What led to the pressure on the rupee?

Putting severe pressure on the rupee, foreign investors withdrew Rs 41,617 crore in March. This outflow has come after withdrawals of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, FPIs have pulled out Rs 225,649 crore (excluding FPI investments in IPOs) since October 1, 2021, mainly anticipating an interest rate hike by the US Federal Reserve.

Moreover, Brent crude prices soared to a near 14-year high of $140 as the Russia-Ukraine war intensified. As India imports nearly 80 per cent of its domestic requirements, high crude oil prices would have led to a steep rise in dollar requirement as well.

Why did the foreign currency assets fall?

The main components of forex reserves are foreign currency assets (FCA), gold holdings and SDRs (special drawing rights) of the International Monetary Fund. The RBI sold dollars from its FCA kitty — kept in global central banks, foreign banks and foreign securities — to strengthen the rupee.

According to RBI’s data, foreign currency assets plunged by $11.108 billion to $554.359 billion in the week ending March 11. The foreign currency assets include the effect of appreciation or depreciation of the dollar and non-US units like the euro, pound and yen held in the international exchange reserves.

However, with gold prices shooting up in the wake of the Russia-Ukraine war, the value of gold reserves increased by $1.522 billion to $43.842 billion in the aforesaid week.

However, the fall in India’s foreign exchange reserves came after it had risen by $394 million to $631.92 billion during the previous week ending March 4. It had touched a lifetime high of $642.453 billion in the week ending September 3, 2021.

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