India's Forex Reserves Decline for Second Week, Despite Governor's Confidence

India's foreign exchange reserves experienced a decrease of USD 3.06 billion, reaching USD 696.67 billion for the week ending July 11. This marks the second consecutive week of decline, according to official data from the Reserve Bank of India (RBI).

The primary component of the forex reserves, foreign currency assets, saw a reduction of USD 2.477 billion, settling at USD 588.81 billion. Gold reserves also experienced a significant drop, decreasing by USD 498 million to USD 84.348 billion.

Additionally, the country's Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell by USD 66 million to USD 18.802 billion during the same reporting week. The Reserve Position in the IMF also decreased by USD 24 million.

Central banks globally are increasingly accumulating gold as a safe-haven asset within their foreign exchange reserves. India has followed this trend, with the share of gold held by the RBI in its reserves nearly doubling since 2021.

In 2023, India's foreign exchange reserves increased by approximately USD 58 billion, a significant turnaround from the cumulative decline of USD 71 billion in 2022. In 2024, the reserves grew by over USD 20 billion, reaching a peak of USD 704.885 billion by the end of September.

The Governor stated that India's foreign exchange reserves are adequate to cover 11 months of imports and approximately 96 percent of external debt. He also expressed confidence in the resilience of India's external sector, noting improvements in key vulnerability indicators.

Foreign exchange reserves are assets held by a nation's central bank, primarily in reserve currencies like the US Dollar, along with smaller holdings in the Euro, Japanese Yen, and Pound Sterling.

The RBI frequently intervenes in the market to manage liquidity and prevent significant Rupee depreciation. This involves buying dollars when the Rupee is strong and selling them when it weakens.