India's forex reserves touched a six-months high, up by $1.727 billion- Economists explain why
Indian forex reserves have been declining till November 2022, as the central bank deployed the reserves to defend the rupee amid pressures caused majorly due to global economic issues.
The foreign exchange reserves of India touched an all-time high in the last six months for the week ending on January 20, 2023. The total forex reserves stood at USD 573.7 billion on January 20, shows the recent data released by the Reserve Bank of India (RBI) on January 27
The country's forex saw an overall all-time high In October 2021 -- level of USD 645 billion. The reserve has been steadily declining since January 2022 and plunged to the lowest in 2022 for the week ending on October 21, 2022. The forex reserve touched USD 524.5 USD billion in the month of October.
Two major factors that contributed significantly to the rise in the forex reserves are the rising value of Indian currency against the dollar and the appreciation of nondollar assets i.e. assets denominated in other currencies.
Reserves rose mostly due to the appreciation of nondollar assets i.e. assets denominated in yen, or euro. Additionally, the rupee has stabilized around the 81.5 mark over the past couple of weeks, which resulted in lesser forex intervention to defend against depreciating pressures on the rupee, asserted economists.
"The increase in forex reserves is primarily due to appreciation of the values of the rupee against the US dollar over the last few weeks and valuation gains due to the decline in the dollar index," added Sakshi Gupta, senior economist, HDFC Bank.
The RBI took several measures to cope up with the skyrocketing value of the US Dollar against the Indian Rupee. One of the major measures included selling dollars, which led to the fall in the forex reserves. Then, the RBI tried to maximize foreign inflows to augment the forex reserves. After witnessing a downtrend since August, the forex reserves have surged by USD 6.56 billion (for the week ending October 28) and recorded the highest jump in the past one year. India's forex reserves hit several lows in the past few months, including dropping to their lowest levels since July 2020.
While there has been an upward trend visible in the forex reserves since November 2022, a sudden fall in the forex reserves for the week ending January 6, again raised eyebrows. However, Indian economy managed to revive and in the next week, the reserves started showing an upward trend.
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