Foreign exchange reserves decreased by $678 million amid lower foreign currency assets

The country’s foreign exchange reserves showed a drop of $678 million in the week ended January 21 to $634.287 billion, according to the data release by the RBI.

In the previous week ending Jan. 14, foreign exchange — or forex — reserves had increased by $2.229 billion to $634.965 billion. The forex pool had reached a lifetime high of $642.453 billion during the week ended September 3, 2021.

For the reporting week ended Jan. 21, the drop in reserves was driven by a decline in foreign exchange holdings (FCA), a key component of overall reserves, according to weekly data from the Reserve Bank of India (RBI) released on Friday.

FCA fell $1.155 billion to $569.582 billion in the reporting week.

Expressed in dollars, the FCA includes the effect of the appreciation or depreciation of non-US units such as the euro, the pound and the yen held in foreign exchange reserves.

Meanwhile, gold reserves rose by $567 million to $40.337 billion in the week ended Jan. 21, the data showed.

Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell from $68 million to $19.152 billion.

India’s reserve position with the IMF also declined by $22 million to $5.216 billion in the reporting week, according to RBI data.

Falling foreign exchange reserves can lead to problems for the government and the RBI in managing the external and internal financial problems of the country.

Higher reserves provide a big cushion in the event of a crisis on the economic front and are enough to cover the country’s import bill for a year. Higher reserves are also helping the rupiah strengthen against the dollar.

An increase in reserves will provide a level of confidence to markets that a country can honor its external obligations, demonstrate the backing of the national currency by external assets, help the government meet its foreign currency needs and meet its external debt obligations , and maintain a reserve for disasters or national emergencies.