Forex Reserves Decline: India's foreign exchange reserves are decreasing continuously, know why this is a cause for concern?

Posted on 16th Jul 2022 by rohit kumar

According to the latest data from the Reserve Bank of India, India's foreign exchange reserves have come down from $ 8.062 billion in the week ended July 8 to a 15-month low of $ 580.252 billion. The weekly data released by the RBI shows that the decline in foreign currency assets (FCA) has led to a decrease in forex reserves. FCA, gold reserves, and entire foreign exchange reserves form the major part.

 

 

India's gold reserves fell from $ 1.236 billion to $ 39.186 billion

 

In the past week, FCA has declined by $6.656 billion to $518.09 billion. The FCA includes both the rise or fall of non-US currencies such as the euro, pound, and yen held in foreign exchange reserves. At the same time, gold reserves have fallen by $ 1.236 billion to $ 39.186 billion during this period. In the last week, the Special Drawing Rights (SDR) with the International Monetary Fund (IMF) has come down by $122 million to $18.012 billion.

 

 

According to RBI data, the country's IMF reserve position declined by $49 million to $4.966 billion for the week ended July 8. For the week ended July 1, the reserves had declined by $ 5.008 billion to $ 588.314 billion. This fall in foreign exchange reserves has been recorded at a time when the Indian rupee has weakened to its all-time low. The Indian rupee has currently slipped to around Rs 80 per dollar against the dollar.

 

What are Foreign Exchange Reserves? What is its impact on the economy?

 

After the news of a fall in the country's foreign exchange reserves, it becomes important to know what is this foreign exchange reserve? If there is a decrease in foreign exchange reserves, then what is going to affect the economy of the country? Talking about India, the foreign exchange reserves of our country are the money and assets kept with the central bank Reserve Bank of India. These include foreign currency assets (FCA), gold reserves, special drawing rights (SDRs), and reserve tranches with the International Monetary Fund (IMF). If the country needs it, it can use the foreign exchange reserves to pay off its foreign debt.

 

The country's trade deficit is widening as foreign exchange reserves are depleting.

 

The first effect of the decrease in the foreign exchange reserves in the country is on the strength of the rupee, as the foreign exchange reserves start decreasing, the value of the rupee decreases. We have seen in recent times that the value of the rupee is continuously falling. On Friday, the price of the Indian rupee has fallen to Rs 79.72 per dollar against dollar.

 

Let us tell you that as the rupee depreciates in the country, the import price of the country starts increasing and the export price starts decreasing. In such a situation, the trade deficit of the country starts increasing. Our country is facing this situation for the last few months. In June, the trade deficit widened to an all-time high of $25.6 billion.

 

The government has taken this step to strengthen the rupee

 

As part of the exercise to reduce the trade deficit, the Reserve Bank on Monday (July 11) has also given the facility to do foreign trade in rupees. It can be used to trade with countries like Russia and Sri Lanka in the current circumstances, which can give some relief to the rupee. Let us tell you that India is the largest importer of crude oil and Russia is the largest exporter of oil. If business starts between the two countries in rupee, then it will help a lot in strengthening the rupee.

 

As the foreign exchange reserves in the country increase, the rupee becomes stronger. Due to this, the country would become economically prosperous and the value of the rupee remains stable. Due to the increase in foreign rupee reserves, the benefit of the strengthening of the rupee also falls on the traders investing abroad. Due to this, they have to invest a minimum of their currency.

 

Also Read: Rupee Vs Dollar: Rupee reaches the lowest level with the fall of 18 paise, inflation will increase in the country, importers will suffer losses