India's forex reserves declined by nearly $10 billion which is highest in 2 years
- India’s foreign exchange reserves fell by $9.64 billion to $622.275 billion during this week
- This is the biggest fall in reserves in nearly two years after it plunged by $11.98 billion in 2020, when the Covid-19 pandemic hit India and FPIs pulled out funds.
Reasons for fall in forex reserves
- Reserve Bank of India (RBI) sold dollars to prevent sliding in value of rupee
- The value of rupee fell due to intensification of India-Ukraine war and flaring of crude oil prices
- When the central bank sells dollars, it takes out an equivalent amount in rupees, thus reducing the rupee liquidity in the system.
- Dollar inflow into the market strengthened the rupee which hit the 77-mark against the dollar
Factors leading to the pressure on the rupee
- Withdrawal of money from foreign investors
- Hiking of interest rate by the US Federal Reserve
- Higher crude prices which triggered demand for more dollars
Reasons for fall in foreign currency assets
- The main components of forex reserves are foreign currency assets (FCA), gold holdings and SDRs (special drawing rights) of the International Monetary Fund.
- The RBI sold dollars from its FCA kitty kept in global central banks, foreign banks and foreign securities to strengthen the rupee which led to fall in FCAs.