India’s Forex Reserves Decline by $5.69 Billion to $634.58 Billion
India’s foreign exchange reserves have decreased by $5.69 billion, bringing the total to $634.58 billion as of January 3, 2025. This marks the fifth consecutive week of decline, with a cumulative reduction of $17.8 billion over the prior three weeks. The reserves have fallen by approximately $70 billion from their peak of $704.89 billion in late September 2024.
Components of the Decline
The primary contributor to this decline is the reduction in foreign currency assets, which decreased by $6.44 billion to $545.48 billion. These assets include the effects of appreciation or depreciation of non-US currencies like the euro, pound, and yen held in the reserves. Conversely, gold reserves increased by $824 million to $67.09 billion during the same period. Special Drawing Rights (SDRs) decreased by $58 million to $17.82 billion, and India’s reserve position with the International Monetary Fund (IMF) declined by $18 million to $4.20 billion.
Implications and Outlook
The consistent decline in forex reserves is attributed to the Reserve Bank of India’s (RBI) interventions in the foreign exchange market to mitigate volatility in the rupee, which has been under pressure due to a stronger dollar and slowed capital inflows amidst India’s economic slowdown. Such interventions have tightened banking liquidity and increased short-term rates, potentially leading to further capital outflows and speculation on continued rupee depreciation. The rupee recently reached a record low of 85.97 per dollar. Analysts suggest that the magnitude of the RBI’s forex intervention since October has been substantial, resulting in adverse effects such as tighter banking system liquidity and higher short-term rates at a time of weakening growth. This, in turn, is leading to more capital outflows and possibly dollar hoarding in anticipation of further depreciation in the rupee.
