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Current Affairs

India’s Forex reserves fall

Date: 22 March 2022 Tags: Miscellaneous

Issue

India’s foreign exchange reserves fell by a whopping $9.64 billion during the week ending March 11, 2022.

 

Background

India’s forex reserves have been in ascendency since many years. It is for the first time in two years that the reserves fell.

 

Details

The major reasons for the fall were the rise in crude oil prices and capital outflows as a result of sustained selling by foreign portfolio investors (FPIs). 

 

The decline

  • The Rupee started to depreciate after Russia-Ukraine war intensified. The Reserve Bank of India intervened after Rupee crossed 76- mark.

  • The RBI sold dollars through PSU banks to prevent a further slide in value. The RBI sold $5.135 billion to banks and agreed to buy back at the end of the swap-settlement period.

 

The move

  • When RBI sells dollars, it removes an equivalent amount in rupees. This reduces rupee liquidity in system.

  • The infusion of dollars will strengthen the rupee. This has allowed rupee to recover its value and to close at 75.80/81 against the US dollar.

 

Pressure on rupee

  • Foreign investors withdrew Rs 41,617 crore in March, putting severe pressure on Indian Rupee.

  • Since October 2021, FPI have withdrawn Rs 225,649 crore from Indian markets.

  • This move took place mainly anticipating an interest rate hike by the US Federal Reserve.

  • The Ukraine war led to steep rise in crude oil prices. Since India imports 85% of its requirements, a rise in price will lead to rise in dollar requirement as well.

 

Fall in Forex

  • Majority of Indian Forex reserves are in form of foreign currency assets (FCA), gold holdings and SDRs (special drawing rights) of the International Monetary Fund.

  • The RBI was forced to sell FCA held in central banks, foreign banks and foreign securities in order to strengthen the rupee.