India’s forex reserves plunge to 2-yr low of $524.5 bn

India's foreign exchange reserves plunged to a two-year low during the week ended October 21, 2022, in the wake of the Reserve Bank of India's (RBI) continuous push to defend the rupee's slide against the U.S. dollar. The forex reserves have declined for 11 out of the past 12 weeks, primarily due to depleting foreign currency assets. Overall, the country’s forex reserves have fallen by $115 billion since 2021.

As per the RBI's latest data released today, the country's forex reserves stand at $524.52 billion, a fall of $3.85 billion over a week's variation. During the week ending October 14, India's forex reserves dropped by $4.50 billion to $528.37 billion.

In October 2021, the country's forex kitty had reached an all-time high of $645 billion. The current forex reserves are lowest since July 2020. The reserves have been declining as the central bank has been deploying the kitty to defend the rupee amid pressures caused majorly by global developments.

Of the total reserves, foreign currency assets declined by $3.5 billion to $465 billion, while gold reserves plunged $247 million to $37.2 billion in the week ended October 21, 2022. SDRs (special drawing rights) surged $7 million to $17.4 billion. India's reserve position in the IMF declined from $14 million to $4.8 billion.

The rupee continues to depreciate against the U.S. dollar, with the domestic currency currently at 82.37 against the greenback. The rupee touched a historic low of 83 per U.S. dollar on October 19. Overall, the domestic currency has depreciated 12% against the U.S. dollar so far this year. Before this, the local currency had hit an all-time low of 82.69 against the USD on October 10.

The rupee slide came as finance minister Nirmala Sitharaman during her six-day visit to the U.S earlier this month said the Indian rupee had withstood the sharp strengthening of the U.S. dollar and performed much better than many other emerging market currencies. She said the Reserve Bank of India (RBI) was working to contain the rupee’s volatility and that the rupee will find its own level.

"Dollar is strengthening incessantly. So obviously, all other currencies are performing against the strengthening dollar. I am not talking about technicalities but it is a matter of fact India's rupee probably has withstood this dollar rate going up,” the FM said.

The recent depreciation of the rupee against the U.S. dollar has contributed to higher inflation in India, forcing major global bodies like the World Bank and the International Monetary Fund (IMF) to downgrade India’s GDP growth forecast for FY23.

In fact, India's retail inflation spiked 7.41% in September, at the fastest pace in five months. The currency instability gives a rise to higher inflation as imports become more costly. This also means that the central bank will have to keep rising key lending interest rates.

Why is the USD strengthening? The IMF says it’s because of the US’s economic fundamentals i.e. rapidly rising interest rates and more favourable terms of trade caused by the energy crisis in Europe following the war.