India’s forex reserves have fallen by $110 billion in the last 13 months as the rising inflation, capital outflows and appreciating dollar created a turmoil in the foreign exchange market.
- The foreign exchange reserves fell to their lowest level since July 2020 and also marked the ninth consecutive week of fall.
- The forex reserves have fallen from $607 billion in end-March and depleted by $110 billion from $642.453 billion seen on September 3 last year.
What are forex reserves?
- Forex reserves are external assets in the form gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the Reserve Bank of India.
- Components: India’s foreign exchange reserves comprise –
- Foreign currency assets (FCAs) – These are maintained in currencies like US dollar, euro, pound sterling, Australian dollar and Japanese yen.
- SDR (special drawing rights) in IMF – This is the reserve CURRENCY with IMF
- RTP (reserve tranche position) in IMF – This is the reserve CAPITAL with IMF
Factors affecting FOREX reserves –
- FPI inflows — Greater FPI inflows increases the forex reserve.
- FDI inflows — Greater the FDI inflows, greater will be the forex reserves.
- Dip in crude oil prices — Since India is an oil importing currency, dip in crude oil prices increases the forex reserves.
- Import savings — Reduction in imports increases the foreign exchange reserves.
- Dip in gold imports — Gold is a big import component for India. Dip in gold imports increases the forex reserve.