India's Forex Reserves Decline Amid Rupee Pressure

RBI Utilizes Forex Reserves to Manage Rupee Volatility, Says Union Bank Report

Mumbai, December 5: The Reserve Bank of India (RBI) is actively employing its foreign exchange (forex) reserves to curb currency volatility amid persistent dollar outflows, according to a report by Union Bank of India.

India's forex reserves have declined significantly from their peak of USD 705 billion to USD 656.58 billion as of November 22, 2024. The report attributes this decline to the central bank's efforts to stabilize the rupee, which has been under pressure due to sustained foreign portfolio investor (FPI) outflows from the equity market.

"Persistent FPIs outflows from the equity market have led the rupee to depreciate to record lows. However, our central bank is likely curtailing volatility through utilization of forex reserves," the report noted.

Key Highlights from the Report

1. Forex Reserves Drop:
   India's forex reserves fell by USD 1.31 billion in the week ending November 22, 2024, marking a total decline of USD 48.30 billion from their all-time high of USD 705 billion.
2. Rupee at Record Lows:
   The Indian rupee continues to weaken, reaching 84.7225 against the US dollar at the time of reporting.
3. Government Fiscal Position:
   For the first time since April 2023, the government’s balance slipped into Ways and Means Advances (WMA) as of November 15, 2024. However, it recovered to INR 1.3 lakh crore by November 22, supported by month-end government spending.
4. Banking Sector Trends:
   The credit-deposit growth gap in the banking sector has narrowed. Deposit growth stood at 11.2%, while credit growth was at 11.1% for the fortnight ending November 15, 2024. This shifted the credit-deposit wedge back to negative at 6 basis points after being positive at 15 basis points in the previous fortnight.

RBI’s Measures and the Broader Economic Picture

The report highlights the proactive steps taken by the RBI to manage liquidity, maintain currency stability, and address fiscal challenges amid global economic volatility. Despite these measures, the rupee remains under pressure, reflecting the complex interplay of external factors like dollar strength and domestic fiscal constraints.

As the rupee hovers near record lows, the RBI's strategies, including the judicious use of forex reserves and liquidity injections, underscore its commitment to economic stability. However, the challenges remain significant, with global uncertainties and domestic fiscal issues requiring continuous attention.

India’s economic framework faces a critical juncture, with the central bank’s interventions playing a pivotal role in shaping the trajectory of growth and stability.