India's foreign exchange reserves have taken a significant hit, experiencing the sharpest decline since records began. For the week ending November 15, 2024, the reserves plummeted by $17.76 billion, settling at $657.89 billion. This drop is notable as it marks the lowest level the reserves have seen in four months, raising concerns among economists and policymakers alike.
The Reserve Bank of India (RBI) reported this staggering decrease mainly due to several intertwined factors. The record dip surpasses the previous high of $15.5 billion registered during the global financial crisis of October 2008, illustrating just how drastic this drop is.
Several key causes led to this sudden decline, starting with the strengthening of the U.S. dollar, which has put considerable upward pressure on global currency markets and particularly on the Indian rupee. Since the U.S. presidential election, the dollar has surged significantly, rising from approximately 103-104 to over 107.5 on the dollar index.
Among the central bank's strategies to stabilize the rupee has been selling dollars to limit volatility. This approach aims to cushion the negative impact of the dollar’s strength on the Indian currency. Consequently, the rupee has depreciated approximately 0.46% against the dollar throughout November, with the RBI's interventions becoming increasingly necessary to prevent more significant falls.
Compounding the situation are rising imports coupled with declining exports. Increased demand for foreign goods has led to higher dollar purchases by India, outstripping the sales generated by exporters, which has strained the forex reserves even more. Consequently, the balance of payments has tipped unfavorably.
Another notable aspect influencing the forex reserves is the downtrend in global gold prices. With gold being one of India's substantial reserve components, the 4.5% slump recorded internationally contributes to the overall decline. Currently, gold-related holdings sit around $65.75 billion as part of the total reserves.
Global factors have also played their part. Post-election dynamics, characterized by intensified foreign investor withdrawals, have contributed to the accelerating decrease. Corresponding trends of weakening currencies, such as the euro and British pound against the dollar, have intensified capital exit scenarios from India, adding pressure on the forex reserves.
Foreign institutional investor (FII) sell-offs from both Indian equity and debt markets have also been substantial. The steady withdrawal activities reflect increasing concerns about India's economic outlook, which could potentially hamper investor confidence moving forward.
According to experts, these developments don't solely translate to merely selling dollars. Valuation adjustments concerning foreign assets and non-dollar denominated reserves suggest losses not only stem from market conditions but revaluation changes too. While reports indicate significant dollar sales by RBI, market analysis indicates revaluation losses have accounted for less than $10 billion of the total decline.
Looking back, India's forex reserves had peaked at $704.885 billion back on September 27, 2024, but since then, they've faced substantial contraction, dropping nearly $47 billion over 49 days. Despite this recent dip’s magnitude, the RBI maintains optimism, describing the current level of reserves as still adequate, indicating they cover about 11 months of imports, thereby providing India with some buffer against external economic shocks.
The situation has provoked reactions from various quarters, including policymakers and financial institutions, with many calling for immediate evaluations of the country's trade and economic policies to mitigate vulnerabilities and manage currency risk more effectively.
This episode serves as a reminder of the intricacies surrounding foreign exchange reserves and their fundamental role in ensuring economic stability. Maintaining adequate forex reserves remains imperative, especially as external pressures continue to challenge the delicate equilibrium of the Indian economy.
