India's Foreign Exchange Reserves in Decline: Dollar Strength Pressures Rupee

Recently, India's foreign exchange reserves have hit an impressive record low, dropping to their lowest level in over four months. The reason for this decline lies in the strengthening of the US dollar following the American election outcome and the active intervention of the Indian central bank, which has sold off dollar reserves to prevent further depreciation of the rupee. Data from the Reserve Bank of India (RBI) shows that reserves fell by an impressive $17.8 billion to $657.89 billion in the week ending November 15 – the largest weekly decline since data collection began in 1998. Overall, foreign exchange reserves have shrunk by nearly $30 billion over the past six weeks, having decreased by $47 billion since the record high in September. This downward trend has been influenced by both the central bank’s market interventions and the revaluation of assets in the reserves. The election outcome in the US led to a rise in dollar strength and US bond yields, resulting in revaluation losses. For the reported week, a revaluation loss of $10.4 billion is estimated, in addition to an estimated net sale by the RBI of $7.2 billion in the same week. The rupee reached a record low of 84.4125 against the dollar and slightly recovered to 84.4450 on Friday, after having fallen even further temporarily. Not only currency fluctuations but also continuous capital outflows from Indian stock markets are putting pressure on the national currency. In November alone, foreign investors withdrew more than $4 billion, after having already withdrawn $11.7 billion in October. Nevertheless, the significance of the central bank’s activities did not go unnoticed; traders report that the RBI's continued interventions have mitigated a stronger reaction in the local foreign exchange market. Aditi Gupta from the Bank of Baroda describes India's foreign exchange reserves as still robust despite recent developments and expects them to rise to $675 to $685 billion by March, given an expected revival in foreign investment and a moderate current account deficit.