Explained: Making use of forex reserves

Source: The post is based on the article “Explained: Making use of forex reservespublished in Indian Express on 25th July 2022.

What is the News?

From a peak of $642.45 billion in 2021, India’s foreign exchange reserves have dipped to $572.71 billion as of July 2022. That’s a fall of almost $70 billion in just over 10 months.

What are Forex Reserves?

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Why have India’s forex reserves fallen?

The major reasons that led to the massive fall in the forex reserves are: 

FPI outflows: There has been a significant outflow of funds from the domestic market by Foreign Portfolio Investors(FPIs).To date in 2022, FPIs have withdrawn $30.3 billion from the Indian financial market.

Rising oil prices: Due to rising oil prices, the import bill goes higher, and India needs to pay more money if the price of oil is rising, which means more outflow of dollars leading to a higher trade deficit.

FCA accounts suffer due to growing dollar strength: A large part of forex reserves is by way of foreign currency assets(FCA) accounts. In FCA, the dollar, euro and pound constitute a significant part. But with the outbreak of hostilities in Eastern Europe, both the pound and euro have been sliding, which had an effect on India’s forex reserves.

Safeguarding rupee in focus: According to analysts, the major focus of the RBI has been to prop up the rupee and in doing so it ended up depleting the forex reserves to some extent.

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