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Contents
- 1 What has caused a decline in the forex reserves?
- 2 What has caused an increase in the forex reserves this year?
- 3 Can India maintain these levels of foreign exchange reserves?
- 4 What is the global status of India’s foreign exchange reserves?
- 5 How are forex reserves measured?
- 6 What is the RBI’s strategy for diversifying its forex reserves?
Source: The post is based on the article “What has flipped the forex reserve Decline of India?” published in Live Mint on 26th July 2023.
Syllabus: GS 3 – Indian Economy – Growth & Development
Relevance: About India’s forex reserves
News: As of March 2023, India’s forex reserves stood at $578.4 billion, showing a decrease of over $28 billion since March 2022.
What has caused a decline in the forex reserves?
The decline in reserves was driven by the appreciation of the US dollar following the US Federal Reserve’s rate hikes, as well as India’s balance of payment (BoP), which experienced a reduction in net capital inflows.
However, this trend reversed after the dollar index peaked in October, and there has been an overall increase in the forex reserves this year compared to the last year.
What has caused an increase in the forex reserves this year?
The increase in forex reserves this year was primarily driven by revaluation gains due to a weaker dollar and higher capital inflows.
Additionally, the settlement of oil imports from Russia are not made in dollars, has also helped the reserves to increase.
Can India maintain these levels of foreign exchange reserves?
The US Federal Reserve’s rate hikes have resulted in foreign investments flowing into the US treasury and a simultaneous outflow of capital from India.
However, the US Fed has already raised rates by 75 basis points and it is expected to raise interest rates further by 25 basis points. This could potentially lead to increased capital inflows into emerging markets like India.
Moreover, India’s BoP has significantly improved, and the projected current account deficit is less than 2% of GDP. Equity capital flows have also revived, with India drawing the most of these flows among its fellow emerging market nations.
Hence, it is expected that India can maintain these levels of foreign exchange reserves.
What is the global status of India’s foreign exchange reserves?
India holds the fourth-highest forex reserves globally, with China, Japan, and Switzerland occupying the top three positions, respectively.
Unlike many countries that achieve a large current account surplus through competitive exports, India, Brazil, and the US have built their forex reserves mainly through capital flows, not relying heavily on current account surpluses.
How are forex reserves measured?
Read Here: India’s forex reserves rise $6.30 bn to $584.75 bn and Explained: Forex reserves at all-time high
The value of these reserves can change each week based on exchange rates and gold prices.
When the US dollar goes down or gold prices rise, the reserves increase in value. However, if the US dollar becomes strong or gold prices drop, the value of the reserves goes down.
What is the RBI’s strategy for diversifying its forex reserves?
The RBI aims to reduce reliance on foreign currencies by internationalizing the Indian rupee.
It is exploring the use of currencies from Asian Clearing Union member states, including the rupee, for payment and settlement between these countries.
Additionally, the RBI and the Central Bank of Sri Lanka have agreed to designate the rupee as a foreign currency, facilitating trade and enabling Indian tourists in Sri Lanka to use the rupee for transactions.
