Unprecedented decline in Indian foreign exchange reserves, but enough to cover imports

Mumbai: Foreign exchange reserves fell by a record $18 billion during the week ending November 15, which is believed to be the sharpest fall ever. This decline was mainly due to withdrawal of funds from the Indian stock market by foreign investors.

According to Reserve Bank of India (RBI) data, foreign exchange reserves reached $657.9 billion, down by $17.8 billion from the previous week. The decline was driven by a $15.5 billion decline in foreign currency assets, to $569.8 billion, and a $2 billion decline in gold reserves, to $65.7 billion.

Reserves peaked at $704.9 billion on September 27, and then declined by $47 billion in the 49 days that followed. According to dealers, the fall has been caused by the intervention of the central bank, which meets the demand withdrawn from the market by increasing the supply of dollars. Foreign portfolio investors are withdrawing funds from the Indian stock market, which is further affecting the situation.

However, while this decline reflects RBI intervention, it is not entirely a result of dollar selling. The figures also take into account changes in the value of foreign currency bonds and non-dollar assets. Experts estimate the reparations deficit to be less than $10 billion.

Although the reserves have declined, they are currently enough to cover 11 months of India’s imports. “Import cover should not be the sole metric to measure forex adequacy,” said a dealer. “The most important thing at present is the capacity of the reserves to cope with the withdrawal of funds from the foreign portfolio.”

This news is important from an economic point of view, and it will be important to see how effective the policies of the Reserve Bank of India are in keeping the Indian currency stable.