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Forex Reserves Formidable But Vain Amidst a Global Tide

Forex Reserves Formidable But Vain Amidst a Global Tide

The Reserve Bank of India (RBI) has used its formidable foreign exchange reserves to prevent rupee from depreciating and weakening further. However, the central bank believes that all these efforts will be futile in the current climate of a global tide against currencies. They think that the depreciation of the INR is a part of the bigger trend and even selling dollars to defend the Indian currency will not be sufficient enough against the global tide.

“There are certain factors, like global spillovers, which the RBI can do very little about. India is a price-taking country. It will be futile if the RBI tries to resist a global tide. But if there are country-specific factors, then the RBI has formidable reserves,” said an anonymous person. This comes after the Indian currency slumped to an all-time low against the dollar on May 9 as the US Federal Reserve raises the federal funds rate target range by 50 basis points previous week. Moreover, a 10-year US government bond crosses 3 percent on May 5.

The person also commented, “There is a fly home bias now”, talking about the outflow of foreign capital from certain countries. The RBI has been in an attentive position for the foreign exchange market in the recent days to prevent the further depreciation of the rupee and reduce the volatility of its exchange rate. Currently, the central bank has no specific number for the exchange rate in mind as it more concerned with the intra-movements and restricting it to a certain number of paise.

The foreign exchange reserves have declined in the past few weeks to $597.73 billion, as reported on April 29. As per MoneyControl, the fall in the FX was not due to RBI’s activity in the market but due to valuation losses in the bank’s non-dollar assets. THE RBI’s foreign exchange reserves are held as denominations in different currencies. Although the US dollar is the largest component, its appreciation with respect to other currencies like Euro, Yen, or the British Pound means that there is a fall in its value of these currencies in dollars. This further results in the decline of RBI’s foreign exchange reserves, again tabulated in dollars.

As per the information, the next data for foreign exchange reserves will be released on May 13. The source reveals that this will likely show a fall in the reserves before a rise could be seen in the next report publication.

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