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India’s Forex Reserves At 2-year Low

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What has happened?

  • India’s forex reserves slumped to the lowest in over two years, marking the third straight week of decline as the Reserve Bank of India, true to its word,
  • Intervened to keep the rupee from weakening past 80 per dollar during a week when the dollar surged to over two-decade highs.
  • The RBI’s weekly statistical data showed the country’s foreign exchange reserves fell by $6.687 billion to $564.053 billion in the week ending August 19, Marking its lowest in over two years and the third week of decline in a row.
  • The quantum of fall in the latest week, $6.687 billion, was the largest since mid-July.

Down from $640 billion

  • Barring the increase in the last week of July, which seems like a statistical blip, India’s forex war chest has declined every single week since early July.
  • It has fallen for 20 of the 26 weeks since Russia invaded Ukraine in late February.
  • That slump in forex reserves by a touch over $67 billion since the Ukraine crisis and nearly $80 billion from its all-time highs last year echoes the slide in the rupee from about 74 per dollar to near 80, a level which analysts say the RBI has defended ferociously.
  • The fate of the Indian currency has been driven by the rampant dollar in international markets, driven by an exodus of capital into dollar-denominated assets and at the cost of almost every other major currency in the world.
  • The RBI has intervened and has openly said it would do whatever it takes to defend the rupee from wild volatility.

Is it a worry for Indian economy?

  • Still, India’s forex reserves are the fourth largest globally, according to RBI governor Shaktikanta Das after the latest rate-setting meeting when the central bank hiked rates for the third consecutive time.
  • A report showed that India has built up buffers against cyclical difficulties and has ample foreign exchange reserves to withstand pressure on credit worthiness, S&P Global Ratings said on Thursday.
  • The country has a strong external balance sheet and limited external debt, making debt servicing not so expensive.

  • A separate Reuters report quoting government and industry sources showed that,
  • India might offer incentives to exporters settling deals in rupees to promote the currency’s attractiveness and raise the sales of commodities to Russia, which have decreased due to western sanctions.

conclusion

  • On an absolute basis, the 2008-09 global financial crisis led to a drawdown of $70 billion in the reserves,
  • Which came down to $17 billion during the COVID-19 period and stood at $56 billion as of July 29 this year due to the Ukraine invasion-related impact.
  • But for now, the current crisis is far from over and may mean a further erosion in the country’s forex war chest.

Q) Foreign exchange reserve cannot include which among the following?

  1. Banknotes
  2. Deposits
  3. Bonds
  4. None of the above

 

 

 

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