ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Dwindling Foreign Exchange Reserves

The depleting import cover of reserves will further aggravate external sector vulnerabilities.

The euphoria created by the substantial increase in the country’s foreign exchange reserves over the last few years has slowly dissipated in the recent months. The reason is the reversal of the pickup in dollar inflows and the acceleration of dollar outflows over the last four quarters. Consequently, the total foreign exchange reserves have steadily fallen from a peak of $642 billion in early September 2021 to $546 billion by the middle of September 2022, the lowest level in around two years.

While a part of the fall in reserves is due to the changes in the exchange rates of the basket of currencies that make up the reserves, the substantial share is on account of the intervention of the Reserve Bank of India (RBI) in the foreign exchange markets. As the rupee started depreciating sharply following the growing imbalances in the external sector accounts and the appreciation of the dollar, the RBI had no option but to draw down the reserves and sell dollars. Such interventions helped reduce the exchange rate volatility of the rupee and prevent excessive speculation that could have anchored expectations of a continuous depreciation of the rupee. These interventions in the foreign exchange markets over the last four quarters have depleted the foreign exchange reserves by around $98 billion or close to one-fifth of their peak levels.

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Updated On : 8th Oct, 2022
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