India’s foreign exchange reserves have been witnessing a steady decline in recent times. These reserves have come down to $634.6 billion in the week ending January 3, 2025, which is much below the high of $704.9 billion achieved on September 27, 2024. India has recorded a decline of more than $70 billion in foreign exchange reserves in the last 14 weeks.
Decline in currency reserves: historical perspective
Not the longest weekly decline
- The decline, which lasted 30 weeks from March 2022 to May 2022, was the longest ever.
- The current downturn (October 4, 2024 to January 3, 2025) is 14 weeks long, which could be the fifth longest ever.
Second biggest decline in terms of value
- There has been a decrease of $70.3 billion in the 14 weeks between October 4, 2024 and January 3, 2025.
- Earlier, the biggest decline was recorded at $71.4 billion (3 June 2022 to 4 November 2022).
Major examples of sharp decline
- 2008 global financial crisis:
- Foreign exchange reserves fell 15.8% between September–December 2008.
- 2022 Federal Reserve Impact:
- Reserves fell 11.9% between June-November 2022.
- Current decline:
- A decrease of 9.97% between October 4, 2024 and January 3, 2025.
economic effects of decline
currency reserves and import cover
- March 2024: India had import cover of 11.3 months.
- November 2024: It reduces to 11 months.
- RBI says reserves are still sufficient to cover imports.
impact on rupee
- The rupee has reached its lowest level against the dollar during the current decline.
- Average fall:
- A 2.8% decline typically occurs during long-term shortages.
- The rupee has fallen 2.5% in the current period (14 weeks).
- Biggest decline:
- The rupee depreciated 10.13% between April 20 and September 7, 2018.
expert opinion
Reason:
- Dollar strength:
The dollar has strengthened in the global market, increasing pressure on the rupee. - Reduction in foreign investment:
Foreign portfolio investment (FPI) in India has decreased. - Import increase:
The increase in import cost of crude oil and other commodities affected the currency reserves. - RBI intervention:
RBI intervened in the market to keep the rupee stable, which led to fall in reserves.
Solution:
- RBI lets rupee fall for short term relief, but for long term solution:
- Increasing exports.
- Implementing economic reforms.
- Attracting disinvestment and foreign investment.
Main reasons for decline
- Weakness of rupee against dollar.
- International financial crisis.
- RBI intervention.
- Increase in imports and decrease in exports.
