India’s foreign exchange reserves have experienced a decline for the second consecutive week, reaching a one-month low of $589.14 billion as of May 26, according to data released by the Reserve Bank of India (RBI) on Friday. This decline amounts to a decrease of $4.34 billion compared to the previous week. The previous week had witnessed a substantial fall of $6.05 billion, marking the largest decline in over three months.
To stabilize the rupee and prevent excessive fluctuations, the central bank, RBI, actively intervenes in the spot and forward markets. The RBI’s intervention aims to prevent abrupt movements in the value of the Indian rupee against other currencies. Fluctuations in foreign currency assets, when expressed in dollar terms, incorporate the impact of currency appreciation or depreciation of other currencies held within the RBI’s reserves.
It is worth noting that India’s foreign exchange reserves encompass not only its own holdings but also its Reserve Tranche position in the International Monetary Fund (IMF). The inclusion of the Reserve Tranche position provides India with additional liquidity and stability in its foreign exchange reserves.
During the week ended May 26, the Indian rupee experienced a marginal 0.1% increase. Throughout the week, the rupee traded within a range of 82.5575 to 82.8500 against the US dollar. However, by the end of the week, the rupee closed at 82.3050, marking its best performance in five weeks.
The decline in India’s foreign exchange reserves over the past two weeks raises concerns about the stability of the country’s external finances. Foreign exchange reserves play a crucial role in supporting a nation’s ability to manage its currency value, meet international obligations, and maintain financial stability. While a moderate decrease in reserves can be attributed to various factors, sustained declines may indicate a potential strain on the country’s balance of payments or increased demand for foreign currency.
The RBI closely monitors these developments and may take further steps to ensure the stability of the rupee and manage the country’s foreign exchange reserves. The central bank has a range of tools at its disposal, including intervention in the foreign exchange market, implementing monetary policy measures, and attracting foreign investments.
As the global economic landscape continues to evolve, it is crucial for India to maintain a robust and resilient foreign exchange reserve position to navigate potential challenges and mitigate the impact of external shocks on its economy.
