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Current Affairs

India’s Forex reserves drop

Date: 10 May 2022 Tags: Miscellaneous

Issue

India’s Forex reserves have fallen below the $600 billion mark owing to capital outflow and strengthening of dollar.

 

Background

India had achieved a record high of $642.45 billion in September 2021. The decline is expected to be more.

 

Details

Reserves have declined by $ 2.69 billion to $ 597.72 billion during the week ended April 29. With this fall, reserves have declined $ 44.73 billion from $ 642.45 billion.

 

Reason for fall in forex reserves

  • The major reason for the fall is the decline in foreign currency assets (FCAs), a major component of the overall reserves.

  • The effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the reserves can also affect reserves.

 

Reasons for India’s decline

  • The US Federal Reserve started monetary policy tightening and interest rate hikes. Foreign portfolio investors (FPIs) have pulled out $ 21.43 billion.

  • The demand for dollars has remained high as the Russia-Ukraine war caused a spike in oil and commodity prices. Many other foreign currencies have depreciated.

  • The decline in gold prices have also caused decline in the value of forex reserves as gold constitutes a major chunk of reserves.

 

Impact on Rupee

  • The Indian rupee has fallen by 57 paise owing to high demand for American dollar. The rising crude prices have also played a part.

  • RBI may be forced to sell some dollars in order to sustain levels of rupee. This may further reduce forex.

 

Forex reserves

  • Forex reserves are foreign assets that are held in a liquid form by a country’s central bank. It is seen as an insurance against financial shocks.

  • The components of forex reserves include foreign currency assets, gold, special drawing rights and the reserve position in the International Monetary Fund.