January 5, 2025: India’s foreign exchange (forex) reserves have been on a downward trajectory for the past three months, continuing a decline that has persisted for most of 2023. In the week ending December 27, the country’s forex reserves decreased by USD 4.112 billion, bringing the total to USD 640.279 billion, according to data from the Reserve Bank of India (RBI).
This marks the twelfth decline in the last 13 weeks, bringing India’s reserves to a multi-month low. The forex reserves were at a record high of USD 704.89 billion in September, but they have since fallen by about 10% from that peak. The ongoing drop is largely attributed to the RBI’s interventions in the currency market, aimed at preventing a sharp depreciation of the Indian Rupee, which has been under pressure in recent months.
The largest component of India’s forex reserves is foreign currency assets (FCA), which stood at USD 551.921 billion. Additionally, gold reserves, another important asset in the reserves, amounted to USD 66.268 billion as per the latest data from the RBI.
Despite the recent decline, India’s forex reserves are still considered robust, with estimates suggesting that they are sufficient to cover nearly a year’s worth of imports, providing a solid buffer against external shocks or volatility in the global markets.
In terms of the broader trend, India’s forex reserves have been fluctuating over the past couple of years. In 2023, reserves increased by approximately USD 58 billion, contrasting with a decline of USD 71 billion in 2022. Even with the recent dip, the reserves for 2024 rose by just over USD 20 billion, indicating a relatively healthy accumulation despite some volatility.
The RBI’s management of foreign exchange markets has played a crucial role in stabilizing the Indian Rupee over the past decade. While the Rupee was once one of the most volatile currencies in Asia, it has become much more stable in recent years. The RBI has strategically bought dollars when the Rupee is strong and sold them when it weakens, which has helped attract foreign investment and supported Indian assets.
The RBI does not target a specific level for the Rupee but aims to prevent excessive volatility by intervening in the currency market when necessary. The RBI’s role in managing liquidity and stabilizing the currency is essential for maintaining economic stability, even as India’s forex reserves experience fluctuations.