India's foreign exchange reserves witnessed a decline in the latest reporting week, reflecting the central bank's activities in the currency market and valuation changes. According to the Reserve Bank of India's (RBI) weekly statistical supplement, the country's overall forex kitty decreased by $980 million to $686.80 billion for the week that ended on May 17, 2024.
Breaking Down the Components of the Forex Reserve Drop
The primary driver behind the weekly decrease was a fall in the Foreign Currency Assets (FCAs), which form the largest component of the reserves. The FCAs dropped by $1.377 billion to $603.662 billion. It is crucial to note that these assets, held in major global currencies like the US dollar, euro, and pound sterling, are influenced by exchange rate fluctuations. The appreciation or depreciation of these currencies against the dollar impacts their valuation in reserve terms.
In a contrasting trend, the value of the country's gold reserves saw a significant increase. Gold reserves rose by $412 million to $59.666 billion during the same week. This rise is typically attributed to an increase in the international price of gold, which boosts the valuation of the RBI's gold holdings.
Movements in SDRs and Reserve Position
The other components of the forex reserves also showed minor shifts. India's reserve position with the International Monetary Fund (IMF) experienced a slight decrease, dipping by $2 million to $4.662 billion. Meanwhile, the Special Drawing Rights (SDRs) allocation saw a modest increase of $7 million, reaching $18.810 billion. SDRs are an international reserve asset created by the IMF to supplement its member countries' official reserves.
Context and Implications of the Reserve Fluctuation
This recent dip follows a period of substantial growth. In the previous week ending May 10, the forex reserves had surged by a massive $2.56 billion to reach a historic high of $687.78 billion. Weekly fluctuations in the reserve levels are normal and are influenced by multiple factors.
The RBI actively intervenes in the foreign exchange market to curb excessive volatility in the rupee's value. When the rupee faces depreciation pressure, the central bank may sell dollars from its reserves to support the local currency. Conversely, it buys dollars when the rupee strengthens too much. These interventions, along with the earnings and payments from overseas investments, contribute to the weekly changes.
Despite the weekly decline, India's forex reserves remain at robust and comfortable levels, sufficient to cover more than 10 months of projected imports. This substantial buffer provides critical stability to the Indian economy, shields it from external shocks, and boosts investor confidence. It strengthens the RBI's ability to manage the rupee's exchange rate effectively and meet the country's external payment obligations.
Analysts monitor these weekly numbers closely as they reflect the underlying flows in the balance of payments and the central bank's management of external sector stability. The overall trajectory of the reserves has been upward over the past year, recovering strongly from the dip experienced in late 2022, underscoring the resilience of India's external sector.
