• India's foreign exchange reserves have hit a three-month low of $675.65 billion, a decrease of $29.2 billion from September's record high.
• The Reserve Bank of India's interventions have helped prevent undue volatility in the rupee, which had weakened to an all-time low.
• The decline in reserves comes amid economic fluctuations, including a slowdown in consumption and inflationary pressures.
• The continued decrease in reserves underscores the need for robust economic strategies to navigate domestic and global economic challenges.

India's foreign exchange reserves have been on a downward trajectory for six consecutive weeks, hitting a near three-month low of $675.65 billion as of November 8, according to data from the Reserve Bank of India (RBI). This marks a decrease of $6.5 billion in the reporting week and a total drop of $29.2 billion from the record-high of $704.89 billion reached in late September. The changes in foreign currency assets are attributed to the central bank's intervention in the forex market and the appreciation or depreciation of foreign assets held in the reserves.

The RBI intervenes on both sides of the forex market to prevent undue volatility in the rupee. During the period for which the forex reserves data pertains, the rupee had weakened to its then-all-time low of 84.38. This was due to a surge in dollar strength and US bond yields following Donald Trump's victory in the U.S. elections. The central bank's strong interventions helped the local currency avert deeper losses, traders said.

The currency settled at 84.3950 on Thursday, after slipping to a record low earlier in the week. The forex reserves also include India's reserve tranche position in the International Monetary Fund. As of November 8, the foreign currency assets stood at 585,383 million U.S. dollars, with gold reserves at 67,814 million U.S. dollars, Special Drawing Rights (SDRs) at 18,159 million U.S. dollars, and the Reserve Tranche Position at 4,298 million U.S. dollars.

India's Economic Challenges and Global Forex Trends

The decline in India's forex reserves comes amid a broader context of economic fluctuations and policy changes. For instance, the Indian stock market logged its sixth weekly loss in seven weeks, as worries about a slowdown in consumption added to concerns over earnings moderation and foreign outflows. Domestic equity benchmarks Sensex and Nifty 50, after smashing many record peaks this year, slipped into a correction mode, with the indices falling 10 per cent from their record high peak hit in September 2024.

Inflationary pressures are also a concern, with onion prices remaining high in November, contributing to India's inflationary pressures driven by the food basket. This comes after onion rates have risen to 52 per cent year-on-year (YoY) compared to the year-ago period. In the international context, other countries are also experiencing changes in their forex reserves. For instance, Bangladesh's October foreign reserves fell below 20 billion USD. The Central Bank, however, said gross reserves were 25.50 billion dollars by the end of October.

The reserves calculated under the IMF's balance of payments and investment position manual method were immediately usable, while gross reserves were also usable subject to the realization of investment. In contrast, Pakistan's reserves held by the SBP rose by US$ 84 million to US$ 11.25 billion during that time, the central bank said in a statement. The foreign currency deposits rose for the 16th successive week, according to the central bank's weekly update released on Thursday.

Historical Precedents and Future Implications

In the past, similar events have occurred where central banks have had to intervene in the forex market to stabilize their currencies. For instance, during the 1997 Asian financial crisis, many Asian countries had to deplete their foreign exchange reserves to defend their currencies against speculative attacks. This led to a severe depletion of forex reserves and eventually forced these countries to devalue their currencies.

The decline in India's forex reserves is a significant development that warrants close monitoring. The RBI's interventions in the forex market have so far helped to prevent undue volatility in the rupee. However, the ongoing economic challenges, both domestically and internationally, could pose further challenges to India's forex reserves and overall economic stability.