The practice
The practice of a central bank maintaining sizable reserves in its foreign exchange is widespread across the world. (Photo credit: Getty Images)
The reserves decreased from 632.74 billion dollars on January 7, 2022, to 562.851 billion dollars as of December 30, 2022, despite the Reserve Bank of India using its arsenal of foreign exchange to stabilise the currency and tamp down capital outflows.
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- Foreign exchange reserves are used to influence monetary policy in addition to being utilised to support obligations.
- China has more than 3 trillion dollar worth of assets held in foreign exchanges.
- It is the nation with the greatest amount of current foreign exchange reserves.
New Delhi: India’s foreign exchange reserves fell by almost 70 billion dollars in 2022, following three years of rise, as inflation and interest rates increased. The reserves decreased from 632.74 billion dollars on January 7, 2022, to 562.851 billion dollars as of December 30, 2022, despite the Reserve Bank of India using its arsenal of foreign exchange to stabilise the currency and tamp down capital outflows. Due to the RBI’s involvement in the currency market to reduce volatility and support the rupee, the forex reserves decreased in 2022. According to Nirmala Sitharaman, the Union finance minister, the RBI recorded net sales of 33.42 billion dollars through September.
What are Forex reserves?
Banknotes, deposits, bonds, treasury bills, and other types of government assets can all be included in foreign exchange reserves. These assets have multiple uses, but they are primarily kept as a safety net in case a central government agency’s home currency depreciates sharply or goes bankrupt.
The practice of a central bank maintaining sizable reserves in its foreign exchange is widespread across the world. Since the dollar is the most traded currency globally, the majority of these reserves are stored in this currency. The British pound (GBP), the euro (EUR), the Chinese yuan (CNY), or the Japanese yen (JPY) are frequently included in the foreign exchange reserves.
Why Forex reserves declined?
Valuation loss: There are two causes given by market players for this drop in foreign exchange reserves. One of the main causes after the US dollar’s appreciation versus global currencies in 2022, was value loss. Due to risk aversion among investors, the aggressive monetary tightening of the US Federal Reserve, and the uncertainties surrounding the Russia-Ukraine war last year, the US dollar appreciated.
“Close to 55-60 per cent of the decline (in reserves) was because of the valuation impact,” Anindya Banerjee, vice president (currency derivatives & interest rate derivatives) of Kotak Securities Ltd, told Indian Express.
Although they are denominated in US dollars, foreign exchange reserves are kept as a multi-currency portfolio that includes popular currencies like the US dollar, Euro, Pound Sterling, and Japanese Yen, among others. According to economists, when the dollar gains, the value of other currencies relative to the US currency decreases, which results in a nominal reduction in the position of global reserves.
Another reason is, as the Reserve Bank sold dollars on the spot market to smooth out the rapid changes in the movement of the rupee brought on by withdrawals from foreign investors, the forex reserves also decreased in addition to suffering a loss in valuation.
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