March 14, 2021 3:56:32 am
Forex reserves declined by $4.255 billion to $580.299 billion during the week ended March 5, according to data from the Reserve Bank of India (RBI). The fall has been primarily on account of a slide in foreign currency assets (FCA) — the largest component of foreign exchange, or forex, reserves.
The overall reserves had increased in the two preceding weeks — by $689 million to $584.545 billion in the week ended February 26 and by $169 million to $583.865 billion in the week ended February 19.
Forex reserves— which have been steadily increasing over the last few months — had touched an all-time high at $590.185 billion for the week ended January 29.
During the reporting week, the FCA dipped by $3.002 billion to $539.613 billion, according to the RBI data, which was released on Friday. In the previous week, these assets had witnessed an uptick of $509 million.
Expressed in dollar terms, the FCA include the effect of appreciation or depreciation of non-US currencies such as the euro, pound sterling and Japanese yen held in the forex reserves.
Meanwhile, gold reserves saw a decline of $1.206 billion, ending at $34.215 billion. In the week ended February 26, they had risen by $172 million.
Further, the special drawing rights (SDRs) with the International Monetary Fund (IMF) fell by $11 million to $1.506 billion in the week ended March 6, the Reserve Bank data showed.
In the preceding week, it had gained by $9 million.
The country’s reserve position with the IMF decreased as well, ending $36 million lower at $4.965 billion in the reporting week, as per the central bank data. It had fallen marginally in the previous two weeks as well.
At a time when the economic growth is set to contract in the ongoing fiscal, rising forex reserves could act as a source of comfort to the government and the RBI in managing the nation’s external and internal financial issues. They act as a cushion in the event of any crisis on the economic front and enough to cover the country’s import bill for a year. A fall in reserves, however, weakens the rupee’s position against the US dollar.
Lower reserves could cause a fall in the confidence of markets that India can meet its external obligations.
The RBI functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government.
It allocates the dollars for specific purposes. For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $250,000 every year.
The central bank uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.
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