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India’s Forex Reserves Have Dropped Below $600 Billion

India’s Forex Reserves Have Dropped Below $600 Billion:

India’s forex reserves have dropped below $600 billion, plunging by about $45 billion since September 3, 2021, when forex reserves stood at an all-time high of $642 billion.

Reasons behind drop in India’s forex reserves:

  • The drop is because of a fall in the dollar value of assets held as reserves by the RBI.
  • The demand for dollars remained high as the Russia-Ukraine war led to a spike in oil and commodity prices.
  • Capital outflows by foreign portfolio investors (FPIs): FPIs pulled out $21.43 billion since September 2021 as the US Federal Reserve started monetary policy tightening and interest rate hikes.
  • Effect of gold prices: Decline in gold prices has also played a part in the decline in foreign exchange reserves.
  • Indian rupee fell to an all-time low against the US dollar, breaking through the 77 rupees to a dollar threshold and trading at 77.63 on Thursday (12th May).
  • If the rupee continues to fall, the Reserve Bank of India will be forced to interfere in the forex market by selling dollars from its foreign exchange reserves.
  • If the RBI prioritises maintaining the amount of foreign exchange reserves, the rupee could depreciate.