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.