India’s Forex Reserves Drop to $690 Billion: Largest Weekly Decline Since April 2022
India’s foreign exchange reserves experienced a significant decline, falling to $690 billion for the week ending October 11, 2023, according to the Reserve Bank of India (RBI). This marked the largest weekly drop since April 2022, as the reserves decreased by $10.75 billion from the previous week. This sharp decline highlights the volatility and challenges faced by India’s financial markets amidst global and domestic economic shifts.
In the week prior, country’s forex reserves stood at $701.18 billion, having already experienced a decrease of $3.71 billion. This decline followed a period where the reserves had reached a record high of $704.89 billion on September 27, marking the sixth consecutive session of record highs. The significant reduction in forex reserves over these weeks has raised concerns about the stability and resilience of India’s financial system.
The outflow of capital from Indian markets has been substantial. Data from the National Securities Depository Ltd. indicates that foreign investors have withdrawn Rs 78,190 crore from Indian bonds and equities in October alone. This outflow is part of a broader trend where, despite foreign investors pumping in Rs 1.79 lakh crore into the country’s debt and equity markets earlier in the year, the latter part of the year has seen considerable withdrawals.
The country’s rupee has also felt the impact of these financial fluctuations. On Friday, the rupee closed weaker against the US dollar, hitting a record low of 84.0737. It briefly touched an all-time low of Rs 84.09 during intraday trading. This depreciation against the greenback follows a closing rate of 84.07 on Thursday. The weakening of the rupee against the dollar underscores the pressure on country’s economy as it grapples with external and internal financial challenges.
A closer examination of the components of India’s forex reserves reveals that foreign currency assets, a major part of the reserves, fell to $602.1 billion for the week ended October 11. These assets are measured in dollar terms and include the effects of the appreciation or depreciation of non-US currencies such as the euro, pound, and yen held within the reserves.
Gold reserves also saw a decrease, dropping to $65.658 billion during the same week. Despite this decline in reserves, gold prices surged in futures trade, increasing by Rs 389 to Rs 77,496 per 10 grams. This rise was driven by multiple triggers, including international uncertainties such as the US elections and geopolitical tensions in West Asia. During the trading day, gold futures hit an all-time high of Rs 77,667 per 10 grams, reflecting the heightened demand for this safe-haven asset amidst economic turmoil.
The special drawing rights (SDRs) decreased by $86 million, bringing their total to $18.339 billion. Similarly, India’s reserve position with the International Monetary Fund (IMF) saw a decline of $20 million, settling at $4.333 billion. These decreases in SDRs and the IMF reserve position contribute to the overall reduction in India’s forex reserves.
Despite these declines, India remains the fourth-largest holder of foreign exchange reserves globally. The RBI’s July bulletin notes that these reserves are equivalent to around 11 months of imports projected for the current financial year. They also cover about 99% of the total external debt outstanding as of the end of March. This context underscores the substantial buffer that India’s forex reserves provide against external economic shocks, despite the recent fluctuations.
The significant drop in India’s foreign exchange reserves to $690 billion, the largest weekly fall since April 2022, highlights the current volatility and challenges within the financial markets. The substantial outflows from its bonds and equities, coupled with the depreciation of the rupee and fluctuations in gold prices, reflect the broader economic uncertainties facing the country. However, with India still holding the fourth-largest forex reserves in the world, there remains a strong buffer against potential economic shocks. Moving forward, the country’s financial authorities will need to navigate these turbulent times carefully to maintain economic stability and investor confidence.