Indian forex reserves fell to $399.28 billion in the week ending 7 September 2018, as per weekly data from the Reserve Bank of India. Foreign exchange reserves, which comprises of foreign currency assets, gold, reserve tranche position and SDRs, were at a level that was last seen 41 weeks before on 17 November 2017.
India's foreign exchange reserves reached a peak of $426.08 billion on 13 April 2018. Then the exchange rate of INR to USD was Rs 64.86. However, since April the Indian rupee has depreciated by 12.53 per cent to record its all-time low of 72.99 against the greenback.
As of 7 September 2018, India has $375.09 billion foreign currency assets, $20.23 billion gold reserves, $2.47 billion in reserve tranche position (reserve tranche is an emergency account that IMF members can withdraw from without agreeing to conditions or paying a service fee) and $1.47 billion in SDR (special drawing rights).
Forex reserves in the first week of 2018 stood at $411 billion, representing a fall of 2.96 per cent as per the latest forex figures disclosed by the RBI.
Forex reserves provide a buffer to the central bank to handle high volatility in the currency markets by controlled selling to defend a weak currency. Moreover, it helps to maintain liquidity in the domestic market in times of economic crises by funding imports, it also provides a safety net for international payment obligations.
The Indian rupee has been one of the worst-performing currencies against the dollar as compared to its peers this year and has breached the 72-mark against the American dollar amid global uncertainties and concerns over inflation.
The forex reserves have been declining in the past few weeks as the Reserve Bank has been selling the US dollar to contain rupee depreciation.
As per economist Madhvi Arora from Edelweiss Securities "RBI has lost $26.8bn since mid-April, partly owing to intervention and also owing to valuation effect. However, outright spot intervention has been tepid in recent months, with July reported net intervention being as low as $1.9bn. A more aggressive intervention could send a strong market signal. We still have comfortable FX warchest and this could still be the least costly measure to effectively manage the currency. However, this could complicate domestic liquidity dynamics, by tightening banking system liquidity which is already running a deficit of more than Rs 1 lakh crore currently".
In this fiscal alone, India's foreign reserves have fallen by $25.58 billion representing a decrease of 6.40 per cent since April 2018. Foreign currency assets have reduced by $24.67 billion, gold by $1.25 billion while our reserve tranche position has seen a rise of $403 million.
Comparing forex reserves with neighbouring countries, Pakistan's forex reserves stood at $16.36 billion. While Chinese forex stood at a massive $3.11 trillion.
Ideally a country should have enough forex to pay for at least 3 months of import bills. With India's monthly import bill close to $40 billion, we have enough forex to last 10 months with the central bank.