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Why are Indian foreign exchange reserves shrinking?

The Indian foreign exchange reserves are shrinking. But how will it affect us? After observing the scenario in Sri Lanka, you must have realised what happens when a country’s FX reserves gets depleted.

India’s foreign exchange reserves continued to decrease by $3.8 billion, according to data made public by the Reserve Bank of India (RBI). Since the beginning of the year, the nation’s foreign exchange reserves have decreased from $108.2 billion to $524.5 billion. However, India is not the only nation whose forex reserves have decreased. According to a Business Standard investigation, Bangladesh and Vietnam’s foreign exchange reserves have decreased more than India’s up until September end. India experienced the greatest loss in its forex reserves among the BRICS nations (excluding Russia).

Foreign exchange reserves

Every week, the RBI issues forex reserve data that includes the following components:

  • Foreign Currency Assets (FCA)
  • Gold
  • SDRs
  • Reserve position in the IMF

FCA is the most essential factor here. For instance, US treasury bills purchased with US dollars. In the previous two years, India has nearly doubled its currency reserves, which are now the fourth highest in the world. It is sufficient to cover our imports for the next ten months. However, the rupee has been losing value versus the dollar in recent months. As a result, the RBI is using its foreign reserves to stabilise the situation. So, for the time being, there is no reason to be concerned.

Importance of Foreign Exchange Reserves

  1. Promoting and preserving trust in the monetary and exchange rate management policies.
  2. Gives the ability to act to defend the national or union currency.
  3. Maintains foreign currency liquidity to absorb shocks at times of crisis or when access to borrowing is restricted, hence reducing external vulnerability.

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