Slump in India's forex reserves continue declined $8.5 billion

India's foreign exchange (forex) reserves continue to decline. In the week that ended December 20, the foreign exchange kitty declined by USD 8.478 billion to USD 644.391 billion, data from the Reserve Bank of India (RBI) showed Friday.

India's forex reserves have slumped eleven out of the past 12 weeks, hitting a new multi-month low.

The reserves had been falling ever since it touched an all-time high of USD 704.89 billion in September.

The reserves have been declining likely due to RBI intervention aimed at aggressively preventing a sharp depreciation of the Rupee. A substantial foreign exchange reserve buffer also helps shield domestic economic activity from global shocks.

The latest RBI data showed that India's foreign currency assets (FCA), the largest component of forex reserves, stood at USD 556.562 billion.

Gold reserves currently amount to USD 65.726 billion, according to RBI data.

Estimates suggest that India's foreign exchange reserves are sufficient to cover approximately one year of projected imports.

In 2023, India added around USD 58 billion to its foreign exchange reserves, contrasting with a cumulative decline of USD 71 billion in 2022.

In 2024, the reserves rose by a little over USD 20 billion. Without the latest decline, the reserves would have been much higher.

Foreign exchange reserves, or FX reserves, are assets held by a nation's central bank or monetary authority, primarily in reserve currencies such as the US Dollar, with smaller portions in the Euro, Japanese Yen, and Pound Sterling.

The RBI closely monitors foreign exchange markets, intervening only to maintain orderly market conditions and curb excessive volatility in the Rupee exchange rate, without adhering to any fixed target level or range.

The RBI often intervenes by managing liquidity, including selling dollars, to prevent steep Rupee depreciation.

A decade ago, the Indian Rupee was among the most volatile currencies in Asia. Since then, it has become one of the most stable. 

The RBI has strategically bought dollars when the Rupee is strong and sold when it weakens, enhancing the appeal of Indian assets to investors. (ANI)