Explained: Why has the forex pool dropped by $44.73 billion in 8 months?

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Eight months after hitting a record high of $642.45 billion in September 2021, India’s foreign exchange reserves have now fallen below $600 billion amid capital outflows and a strengthening dollar .

What happened?

Foreign exchange reserves fell by $2.69 billion to $597.72 billion in the week ended April 29. With this fall, foreign exchange reserves declined by $44.73 billion from the $642.45 billion recorded on September 3, 2021, according to Reserve Bank of India (RBI) data. The decline was due to a decline in foreign currency holdings (FCA), a major component of overall reserves. Currency assets also include the effect of the appreciation or depreciation of non-US units such as the euro, pound and yen held in reserves.

Why have foreign exchange reserves decreased?

One of the main reasons for the decline in foreign exchange reserves is capital outflows from foreign portfolio investors (REITs) who have withdrawn $21.43 billion since September 2021 as the US Federal Reserve began to tighten policy. monetary policy and to raise interest rates. The biggest drop came in March when REITs pulled out $6.56 billion. The demand for dollars also remained high as the Russian-Ukrainian war led to a spike in oil and commodity prices, in addition to the depreciation of other currencies. The loss in value, reflecting the appreciation of the US dollar against major currencies, and the decline in gold prices also played a role in the decline in foreign exchange reserves. FCA movements mainly occur due to the purchase and sale of foreign exchange by the RBI, income from the deployment of foreign exchange reserves, external aid receipts from the central government and changes due to the revaluation of foreign exchange. assets.

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Where is the forex kept outside?

FCAs include multi-currency assets that are held in multi-asset portfolios in accordance with existing standards, which are in line with international best practices followed in this regard, the RBI says. As of September 2021, $383.74 billion was invested in foreign securities, $147.86 billion was deposited with other central banks and the BIS and the balance of $42.00 billion included deposits with commercial banks abroad. RBI’s gold holdings were 743.84 tonnes. The value of gold holdings increased by nearly $4 billion to $41.60 billion as of April 29, 2022.

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What is the impact on the rupee?

On Friday, the rupee fell 57 paise to hit a low of 76.96 – just below the all-time low of 76.97 – to close at 76.92 against the US dollar, weighed down by a strong US currency on the downside. overseas and firm crude oil prices. If the rupee slips further, the RBI will be forced to intervene in the foreign exchange market by selling dollars from its forex pool, which will put pressure on total foreign exchange reserves. However, a senior RBI official has already indicated that he does not want foreign exchange reserves to fall below the $600 billion level. If the RBI gives preference to maintaining the level of foreign exchange reserves, there could be a depreciation of the rupee on the horizon, analysts said.

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