India’s Forex Reserves Plummet by $8.4 Billion to $644.3 Billion

India’s foreign exchange reserves have experienced a significant drop, falling by $8.4 billion to $644.3 billion as of December 20, 2024, according to the latest data released by the Reserve Bank of India (RBI). This decline marks a continuation of the downward trend observed in recent weeks, with the reserves now at their lowest level since June.

Understanding the Decline

The primary reason behind this decline is the outflow of foreign capital from the domestic capital markets. Slowing growth in India has led investors to opt out of investments, aligning with the rebound in G-Sec yields and the pullback on the Sensex. This has forced the RBI to deplete its reserves to prevent a sharper decline in the rupee.

Key Factors Contributing to the Decline

– **Foreign Currency Assets**: The decline in foreign currency assets has been a major contributor to the drop in reserves. These assets decreased by $3.05 billion to $562.58 billion in the week ending December 13, 2024[1].
– **RBI Interventions**: The RBI’s interventions in the foreign exchange market, including the selling of dollars, have also played a significant role in the decline. The RBI intervenes to maintain orderly market conditions by containing excessive volatility in the exchange rate[3].
– **Revaluation Effects**: The revaluation of foreign currency assets due to the appreciation or depreciation of non-US dollar currencies, such as the euro, pound, and yen, has also impacted the reserves[1].

Other Components of the Reserves

– **Gold Reserves**: There was a notable weekly increase in gold reserves, which rose by $1.12 billion to $68.06 billion[1].
– **Special Drawing Rights (SDRs)**: SDRs fell by $35 million to $17.99 billion[1].
– **IMF Reserve Position**: India’s reserve position in the International Monetary Fund (IMF) declined by $27 million to $4.24 billion[1].

Long-term Implications

Despite the current decline, India’s foreign exchange reserves are expected to trend upwards in the long term. According to Trading Economics, the reserves are projected to reach $668 billion in 2025 and $742 billion in 2026[2].

Market Outlook

The RBI continues to monitor the foreign exchange markets closely and intervenes as necessary to maintain stability. The rupee has depreciated by 2.13% in the current calendar year and by 1.90% in the current financial year, indicating ongoing pressure on the currency[3].

Global Context

India’s economy has made significant strides, rising from the “Fragile Five” to become the fastest-growing major economy. The country has secured the 4th position globally in terms of foreign exchange reserves, after China, Japan, and Switzerland[4].