India’s foreign exchange (forex) reserves have experienced a significant drop, falling to $657.89 billion in the week ending November 15, 2024. This marks the sharpest weekly decline in India’s forex reserves since data collection began in 1998, dropping by $17.8 billion. This sharp reduction highlights mounting pressure on the Indian rupee and the broader economic landscape, driven by both global and domestic factors.

Key Drivers Behind the Forex Reserves Decline:

The primary driver behind the fall in India’s forex reserves is the strengthening of the US dollar, spurred by the aftermath of the US election results. The election verdict has raised concerns over potential higher US tariffs on countries like China and other trading partners, further strengthening the dollar and contributing to revaluation losses in the forex reserves. As a result, India’s forex reserves have been eroded for seven consecutive weeks, continuing a downward trend seen since September 2024.

India’s forex reserves have now decreased by nearly $30 billion over the last six weeks, and $47 billion from the record high of $704.89 billion reached in late September. During the week of November 8, 2024, reserves had already dropped by $6.477 billion, further exacerbating the decline.

Reserve Composition and RBI’s Role:

The foreign currency assets (FCA), which account for a major portion of India’s forex reserves, have been impacted by the RBI's market interventions. The Reserve Bank of India (RBI) is likely to have sold dollars to protect the rupee and curb its further decline, as evidenced by the net dollar sales of approximately $7.2 billion during the week of November 15. These interventions, although necessary to manage volatility, also caused a revaluation loss of $10.4 billion during the same period.

Meanwhile, India's gold reserves also dropped by $2.068 billion to $65.746 billion, while Special Drawing Rights (SDRs) and the IMF reserve position saw small declines.

Impact on the Rupee and Forex Market:

The Indian rupee has been under consistent pressure due to a combination of foreign outflows from the Indian equity markets and global economic conditions. The US elections boosted US bond yields and the dollar’s strength, pushing the rupee to a record low of 84.5013 against the dollar last week. It briefly fell to 84.5075 in intra-day trading on Friday, before settling at 84.4450.

Foreign investors have pulled out a significant amount of capital from Indian markets, with net foreign sales of over $4 billion in November, following $11.7 billion in October 2024. This has put additional pressure on the rupee, which remains vulnerable to further declines.

RBI's Strategy to Support the Rupee:

Despite these challenges, the RBI’s intervention in the forex market has been somewhat effective in limiting a more severe fall in the rupee. The central bank has been taking steps to stabilize the currency and prevent excessive depreciation, but without aiming to set a fixed target for the rupee’s exchange rate. RBI Governor Shaktikanta Das has emphasized that the RBI intervenes based on economic conditions, rather than targeting specific exchange levels.

The RBI’s staff has defended its policy, stating that interventions are necessary to safeguard India’s financial stability in the face of external risks. Despite the drop in reserves, experts suggest that India’s forex reserves remain robust relative to external requirements, with an import cover comfortably over 11 months.

Future Outlook:

Experts like Aditi Gupta, an economist at Bank of Baroda, remain optimistic about the reserves, expecting them to stabilize between $675 billion and $685 billion by March 2025, assuming a recovery in foreign inflows and a manageable current account deficit.

While the situation remains fluid, the decline in forex reserves and the rupee’s pressure underscore the challenges faced by India in balancing external vulnerabilities with internal growth. However, India’s reserve position, though impacted, is still seen as relatively strong, ensuring some buffer against global economic uncertainties.

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