Decline in Foreign Exchange Reserve

Decline in Foreign Exchange Reserve

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April 19, 2023

Foreign Exchange Reserves are assets held by a country's Central Bank or monetary authority to assure a country's balance of payments, maintain financial market stability, and affect currency exchange rates. Foreign currency assets, gold, special drawing rights (SDRs), and reserves with the International Monetary Fund (IMF) comprise these Reserves.

India's foreign exchange reserves have fallen to a three-month low - According to the RBI's statistics supplement, India's Foreign Exchange Reserves fell to a three-month low on March 10 this year. The Reserves were at $560 billion, their lowest level since early December. The Reserves were $562.40 billion in the week ending March 3.

Reasons for the Drop in Foreign Exchange Reserves - The RBI has previously said that fluctuations in Reserves are also caused by valuation gains or losses. To limit uncontrolled movements in the rupee's exchange rate versus the dollar, the Central Bank intervenes in the spot and future markets. The drop in India's foreign exchange reserves may also be ascribed to the US banking crisis, which led the rupee to weaken 0.1% versus the dollar last week. The currency ranged from 81.6150 to 82.2975 before closing at 82.5525 on Friday.

The Effects of a Drop in Foreign Exchange Reserves - India's Foreign Exchange Reserves are crucial to the country's economic stability. They protect the native currency from volatility induced by external economic variables such as global oil price fluctuations, international trade policies, and geopolitical concerns. A fall in Foreign Exchange Reserves can cause investors to lose faith in the economy, resulting in capital outflows and additional currency devaluation.

The RBI, on the other hand, has stated that India's Foreign Exchange Reserves are sufficient to fund the country's import bill and foreign debt payments. The Central Bank has also adopted steps to guarantee financial market stability and the value of the currency.

Source - The HINDU