India’s foreign exchange (forex) reserves recorded a decline of $1.88 billion, settling at $623.983 billion for the week ending January 17, 2025, as per data released by the Reserve Bank of India (RBI) on Friday. This marks the continuation of a downward trend observed over recent weeks, raising questions about the underlying factors driving these fluctuations. In the previous week, the forex reserves had plunged by $8.714 billion to $625.871 billion, underscoring a broader trend of depletion. The reserves, once at a record high of $704.885 billion in late September 2024, have seen consistent reductions since, attributed primarily to RBI’s interventions in the forex market and revaluation effects.
The Breakdown: Major Components of Forex Reserves
FCAs, which form the bulk of India’s forex reserves, declined by $2.878 billion to $533.133 billion during the week. These assets, expressed in US dollars, are affected by fluctuations in the exchange rates of non-dollar currencies such as the euro, pound sterling, and yen. The depreciation of these currencies against the dollar typically leads to a decrease in the dollar-denominated value of FCAs.
Bucking the overall trend, gold reserves saw a modest rise of $1.063 billion, bringing the total to $68.947 billion. The increase reflects a combination of price adjustments and possible strategic accumulation of gold by the RBI to diversify its reserve portfolio amid global uncertainties. SDRs, an international reserve asset maintained by the International Monetary Fund (IMF), also edged up slightly by $1 million to $17.782 billion during the reporting week. India’s reserve position with the IMF declined by $74 million, standing at $4.122 billion. This component represents the country’s quota contributions to the IMF, adjusted for borrowing and repayment activities.
Key Drivers Behind the Decline
The recent depletion of forex reserves can be attributed to a combination of factors: To stabilize the Indian rupee amid heightened global volatility, the central bank has been actively intervening in the forex market. These interventions involve selling dollars from the reserves to curb excessive depreciation of the rupee against major currencies. The value of foreign currency assets is subject to the performance of non-dollar currencies held in the reserves. With the US dollar maintaining strength amid global economic uncertainties, the dollar value of other currencies has depreciated, negatively impacting India’s forex reserve valuation. India’s trade deficit, driven by higher imports and fluctuating export earnings, places additional pressure on forex reserves. Furthermore, external debt servicing obligations also contribute to reserve depletion.
Despite the recent drop, India’s forex reserves remain robust compared to historical levels. In January 2024, reserves stood at approximately $565 billion, indicating an increase of over $58 billion within a year. This growth reflects efforts by the RBI to bolster reserves during periods of favorable market conditions.
Why Do Forex Reserves Matter?
Forex reserves play a critical role in maintaining the economic stability of a country. They serve as a buffer against external shocks, including global financial crises, sudden capital outflows, and currency fluctuations. High reserves also enhance investor confidence, ensuring that India can meet its import bills and external debt obligations seamlessly.
The rise in gold reserves highlights its enduring significance as a safe-haven asset. In an environment of geopolitical tensions and financial market volatility, gold provides a hedge against risks associated with fiat currencies. Central banks globally, including the RBI, have been increasing their gold holdings as part of reserve diversification strategies. Looking forward, the trajectory of India’s forex reserves will likely depend on several factors:
The US Federal Reserve’s monetary policy, inflation trends, and geopolitical developments will play a significant role in shaping global currency markets, influencing India’s reserves indirectly.Stronger economic growth could boost exports and attract foreign investments, replenishing reserves. Conversely, sluggish growth or policy uncertainties may exacerbate reserve depletion.The central bank’s approach to managing the rupee’s stability without excessively depleting reserves will be a delicate balancing act.
India’s forex reserves, while witnessing short-term fluctuations, remain a key pillar of economic resilience. The recent decline highlights the challenges posed by global and domestic economic dynamics. As policymakers navigate these complexities, maintaining a balance between stabilizing the currency and preserving reserves will be crucial for sustaining economic stability.