In early April, India's foreign exchange reserves had hit a life-time high of $424.864 billion, and was cited by Asian Development Bank's Chief Economist Yasuyuki Sawada as the reason why India did not need to worry much about currency fluctuations.
Unfortunately, things have changed quite a bit since then. In the week to June 15, forex reserves declined by around $3 billion to $410 billion, as per RBI data. The following week, the reserves dried up by $2.25 billion more. In fact, according to ThePrint.in, the forex reserves have been falling by about $2 billion a week for seven weeks now but top government officials maintain that there's no reason to panic.
Citing insiders, the report added that the falling reserves are a result of the apex bank's intervention to arrest the slide of the rupee, which has depreciated around 8 per cent in the year so far. "This is a natural phenomenon and this is most likely happening due to RBI's stepping in by selling dollars to support the rupee. No amount of reserves is ever adequate," Soumya Kanti Ghosh, chief economic adviser, State Bank of India group, told the portal. He also pointed out that India's forex reserves crossed the $400-billion mark for the first time only in September 2017. High foreign exchange reserves not only help in international payments but also provide a cushion against exchange rate risks and boost sentiments.
According to economic affairs secretary Subhash Chandra Garg, should the need arise, funds would be raised through foreign currency non-repatriable (FCNR) deposits or even sovereign bonds.
To remind you, in 2013, when the rupee hit 68 against the dollar following the 'taper tantrums', the then RBI governor Raghuram Rajan had introduced Foreign Currency Non-Resident Bank (FCNR-B) deposits. The scheme attracted an inflow of $32 billion and changed the course of the rupee.
However, a finance ministry official told the news portal "Our forex reserves are adequate and this dip does not call for any policy action at this point. This is due to global developments." In other words, as Finance Minister Piyush Goyal recently emphasised to reporters at the sidelines of a conference, a "knee-jerk reaction is not called for."
India is not the only country witnessing depleting forex reserves. China's reserves in May fell to $3,111 billion, from $3,125 billion in the previous month.
Given that the rupee is expected to remain under pressure in the near future, India's forex reserves are unlikely to stabilise anytime soon. Among the factors weighing down the rupee are the rising oil prices, global trade skirmishes, tightening of global liquidity and a strong dollar. Though the domestic currency has recovered some ground since its all-time low of 69 to a dollar, plenty of analysts see it touching the 70-mark soon.
With PTI inputs