On 14 July, India’s foreign exchange (forex) reserves stood at $609 billion. On 20 October, they hit a recent low of $583.5 billion before rising again slightly to $597.9 billion on 24 November. What explains this yo-yo-like behaviour? Mint examines the ups and downs of the rupee:
On 14 July, India’s foreign exchange (forex) reserves stood at $609 billion. On 20 October, they hit a recent low of $583.5 billion before rising again slightly to $597.9 billion on 24 November. What explains this yo-yo-like behaviour? Mint examines the ups and downs of the rupee:
What exactly are our forex reserves?
Primarily, foreign currency assets and gold. At the beginning of November 2022, gold made up around 7% of the overall forex reserves of $530 billion. As per the latest data, gold comprises around 7.7% of foreign exchange reserves of $597.9 billion. This has primarily been on account of the price of gold in dollar terms going up by close to 15% during the course of the last one year. While gold reserves are maintained for any financial emergency, foreign currency assets, especially US dollars, are used by the Reserve Bank of India (RBI) to actively manage the value of the rupee against the dollar.
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What exactly are our forex reserves?
Primarily, foreign currency assets and gold. At the beginning of November 2022, gold made up around 7% of the overall forex reserves of $530 billion. As per the latest data, gold comprises around 7.7% of foreign exchange reserves of $597.9 billion. This has primarily been on account of the price of gold in dollar terms going up by close to 15% during the course of the last one year. While gold reserves are maintained for any financial emergency, foreign currency assets, especially US dollars, are used by the Reserve Bank of India (RBI) to actively manage the value of the rupee against the dollar.
How does RBI manage the value of the rupee?
India imports much of the oil that it consumes. During April to September, the country imported 87.5% of the oil that it consumed. In such a scenario, a weaker rupee makes oil imports expensive, and either the end-consumers or the primarily government-owned oil marketing companies need to pick up that bill, making it important for the RBI to ensure that the value of the rupee doesn’t fall too much and too fast against the dollar. It ensures this by selling dollars it has in its foreign currency assets hoard and buying rupees. Doing this ensures the availability of dollars so the value of the rupee against the dollar doesn’t fall quickly.
How has the RBI managed the value of the rupee?
The RBI doesn’t reveal its forex operations. But news reports suggest that over the last few months as the rupee has come under pressure against the dollar, it has been actively managing the value of the rupee. As the RBI has sold dollars from its reserves, forex reserves fell. Foreign currency assets dipped from $540.2 billion in mid-July to $515.2 billion on 20 October.
Why has the rupee come under pressure?
The returns on US government bonds had been going up. The per-year return on a 10-year US government bond stood at 4% in end-July. This went up rapidly in September, touching 5% in late October. Higher returns prompted foreign institutional investors (FIIs) to sell Indian stocks and move money to the US. In September and October, FIIs sold stocks worth ₹39,316 crore. In order to move this money out of India they had to sell rupees and buy dollars. This put pressure on the rupee, forcing the RBI to act.
Why have the reserves now gone up?
The return on the 10-year US government bond fell in November and now stands at around 4.2%. The fall in returns has encouraged FIIs to bring money back into India. In November, they bought Indian stocks worth ₹9,001 crore. In fact, the interesting thing is that FIIs bought bonds worth close to ₹15,600 crore during the month. So, with FII dollars coming into the country again, the RBI hasn’t needed to draw on its dollar reserves to defend the rupee. This is why forex reserves have risen to close to $598 billion.
Read More: Mint Primer: Decoding the fall and rise of India’s forex reserves