Decoding the Fluctuations in India’s Forex Reserves
Understanding the Yo-Yo Behavior and Factors Impacting the Rupee
India’s foreign exchange (forex) reserves witnessed fluctuations in recent months. On July 14th, the reserves stood at an impressive $609 billion, but on October 20th, they hit a recent low of $583.5 billion. However, the reserves then slightly rebounded to $597.9 billion by November 24th. This article aims to analyze the reasons behind this yo-yo-like behavior and examine the factors influencing the value of the rupee.
Examining the Composition of India’s Forex Reserves
India’s forex reserves consist primarily of foreign currency assets and gold. As of November 2022, gold accounted for approximately 7% of the overall reserves, valued at $530 billion. The latest data indicates that gold now represents around 7.7% of the total foreign exchange reserves, which amount to $597.9 billion. The increase can primarily be attributed to the rise in the price of gold in dollar terms, reaching close to 15% over the past year. While gold reserves serve as a safeguard for financial emergencies, foreign currency assets, particularly US dollars, are actively utilized by the Reserve Bank of India (RBI) to manage the rupee’s value against the dollar.
Understanding RBI’s Management of the Rupee’s Value
India heavily relies on imported oil, with 87.5% of oil consumption being sourced from overseas during April to September. In such a scenario, a weaker rupee leads to increased costs of oil imports, ultimately affecting either end-consumers or government-owned oil marketing companies. Thus, it becomes crucial for the RBI to prevent a significant and rapid decline in the rupee’s value against the dollar. To achieve this, the RBI sells dollars from its foreign currency assets and purchases rupees, ensuring a sufficient supply of dollars and stabilizing the rupee’s exchange rate.
RBI’s Active Approach in Managing the Rupee
The RBI is not transparent about its forex operations; nevertheless, news reports suggest that it has been consistently managing the rupee’s value in recent months. As the rupee faced pressure against the dollar, the RBI actively intervened, selling dollars from its reserves. Consequently, the forex reserves experienced a decline, with foreign currency assets dropping from $540.2 billion in mid-July to $515.2 billion on October 20th.
Factors Contributing to Rupee Pressure
The rise in returns on US government bonds played a significant role in creating pressure on the rupee. The annual return on a 10-year US government bond increased from 4% at the end of July to 5% in late October, attracting foreign institutional investors (FIIs) to sell Indian stocks and redirect capital to the US. As a result, FIIs sold stocks worth ₹39,316 crore during September and October, necessitating the sale of rupees to buy dollars for capital transfer. This situation further intensified pressure on the rupee and triggered intervention by the RBI.
Rise in Reserves Explained
The return on the 10-year US government bond declined in November, currently standing at around 4.2%. This decrease in returns encouraged FIIs to reinvest in India, as evidenced by their purchase of Indian stocks valued at ₹9,001 crore during November. Interestingly, FIIs also bought bonds worth approximately ₹15,600 crore within the same month. With the influx of FII dollars into the country, the RBI did not need to dip into its dollar reserves to stabilize the rupee. As a result, the forex reserves have increased to approximately $598 billion.
In conclusion, India’s forex reserves have exhibited fluctuations in recent months. The composition of these reserves, primarily foreign currency assets and gold, alongside the RBI’s active management of the rupee’s value, contribute to the overall stability of the currency. The pressure on the rupee due to rising returns on US government bonds led to the intervention of the RBI. However, with a subsequent decrease in bond returns and the return of FII investments, the reserves have shown an upward trend.
Disclaimer:
The material in this article was compiled using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. The completeness and correctness of the material ensured with due diligence. It is required of users of this material to consult the relevant, applicable legislation. The data given may change without prior notice and does not constitute professional advice. As a result, Estabizz Fintech disclaims all liability for the results of using such material.
