India’s forex reserves have been under pressure since the global financial crisis began in 2008. The reserves have fallen by nearly 70 billion dollars since the start of COVID-19 and are now at just $56 billion. The current crisis is expected to further weaken the country’s forex war chest. However, the reserves are sufficient to cover a year’s worth of imports.
The country has the fourth largest forex reserves in the world, after Japan and Switzerland. The recent declines in the reserve currency are largely attributable to the government’s efforts to maintain the value of the rupee against the dollar. In addition to helping the government meet its external debt obligations, the rising forex reserves also serve as a cushion against cyclical issues, which can negatively affect the country’s economy.
India’s forex reserves rose by $2.4 billion in the week ended July 29. Its foreign portfolio investors returned to Indian markets as net buyers. The forex reserves were estimated to stand at $573.9 billion as of July 29, 2022. The currency reserves have increased three-fold since independence. India now has the fourth largest forex reserves among all economies in the world. While the reserves have increased over the last few years, they are still low in value when compared to historical levels over the past 20 years. However, a recent economic survey indicates that India will recover to a higher level by the end of this year and remain relatively stable for several years.
Reserves are not sufficient if imports exceed the country’s exports. This is because India has a structural current account deficit. In the past, the government has been able to fund this deficit with capital inflows. Similarly, a surplus in the capital account has increased the country’s forex reserves.
The Reserve Bank of India has been utilizing its foreign exchange reserves to control market volatility in recent weeks. This policy has increased key interest rates by about 50 basis points. The key lending rate is at 5.40 percent now. The reserve currency was at $593 billion on June 24. However, by July 22, the reserve currency had dropped by $1.1 billion. Rising US interest rates and a risk-off sentiment drained domestic funds from the Indian market. These factors are affecting both inflation and external deficits, as well as company profits.
Diversification is a strategy used by many countries to manage their reserves. Switzerland and India have invested in dollar assets over the years to keep their currencies from depreciating against their national currency. This strategy has allowed these countries to diversify beyond their insurance needs and to get better returns in the past. However, the United States is still the world’s largest currency reserve holder.
The Reserve Bank of India’s foreign exchange reserves is a key source of stability for the Indian economy. The amount of foreign currency held by India’s central bank helps the country pay for imports and foreign debts. It also serves as a backup fund in times of crisis. These foreign exchange reserves are held in banknotes, bonds, and treasury bills, most of which are held in US dollars.
