India’s foreign Exchange Reserves

➖ The Indian rupee has been witnessing a steady decline this year, losing almost 4% against the U.S. dollar since the beginning of 2022.

➖ The drop in India’s forex reserves is believed to be largely due to steps taken by the Reserve Bank of India to support the rupee.

🔸 The drop in forex reserves is due to a fall in the dollar value of assets held as reserves by the RBI.

🔺 For instance, if a portion of the reserves are in euros and the euro depreciates against the dollar, this would cause a drop in the value of forex reserves.

➖ The value of any currency is determined by demand for the currency as well as its supply.

➖ When the supply of a currency increases, its value drops, when the demand for a currency increases, its value rises.

➖ In the forex market, the supply of rupees is determined by the demand for imports and various foreign assets.

➖ If there is high demand to import oil, it can lead to an increase in the supply of rupees in the forex market and cause the rupee’s value to drop.

➖ The demand for rupees in the forex market, on the other hand, depends on foreign demand for Indian exports and other domestic assets.

➖ For instance, when there is great enthusiasm among foreign investors to invest in India, it can lead to an increase in the supply of dollars in the forex market which in turn causes the rupee’s value to rise against the dollar.

❇️ The Foreign Exchange Reserves of India consists of below four categories;
✓ Foreign Currency Assets
✓ Gold
✓ Special Drawing Rights (SDRs)
✓ Reserve Tranche Position