India’s Forex Reserves Plummet to 7-Month Low

India’s foreign exchange reserves have taken a significant hit, falling to a more-than-seven-month low of $644.39 billion as of December 20, according to data released by the Reserve Bank of India (RBI). This marks the third consecutive week of decline, with the reserves dropping by $8.5 billion in the reporting week, the largest weekly fall in over a month[1].

Factors Contributing to the Decline

The decline in forex reserves can be attributed to several factors, including the RBI’s intervention in the forex market to curb undue volatility in the rupee. The central bank intervenes on both sides of the market to manage the exchange rate. Additionally, changes in foreign currency assets are influenced by the appreciation or depreciation of foreign assets held in the reserves.

Impact on the Rupee

The rupee has been on a downward spiral, hitting a new all-time low of 85.10 per U.S. dollar. Since slipping below the 84 handle in mid-October, the rupee has been under pressure due to concerns over India’s growth slowdown, foreign outflows, U.S. President-elect Donald Trump’s trade policies, and a hawkish Federal Reserve. Regular interventions from the RBI have helped keep the rupee’s decline in check, but the currency remains under pressure[1][4].

Current Account Gap Narrows

Despite the challenges, India’s current account gap has narrowed to 1.2% of GDP in the July-September quarter, according to the RBI. This improvement is a positive sign, but the overall economic outlook remains cautious due to the sharp slowdown in economic growth and the record-high trade deficit posted in November[1].

Forex Reserves Breakdown

The forex reserves include foreign currency assets, gold, Special Drawing Rights (SDRs), and the reserve tranche position in the International Monetary Fund. Here is a breakdown of the reserves as of December 20:

• Foreign currency assets: $556.562 billion
• Gold: $65.726 billion
• SDRs: $17.885 billion
• Reserve Tranche Position: $4.217 billion

Outlook

The Indian rupee is expected to remain under pressure due to continuous evidence of capital outflows and expectations of an incoming rate cut by the RBI. Domestic inflation fell to 5.5% in November, aligning with the scenario that allows the RBI to deliver its first rate cut by the March quarter of 2025. However, the rupee’s decline is expected to continue, with forecasts suggesting it will trade at 84.85 by the end of this quarter and 85.00 in 12 months[4].