India’s Forex Reserves See Sharpest Weekly Fall in Record, Hit 4-Month Low

India’s foreign exchange reserves suffered their largest weekly drop on record, falling by $17.76 billion to a four-month low of $657.8 billion for the week ending November 15, 2024. This marks the sharpest decline since records began in 1998, surpassing the previous high of $15.5 billion during the global financial crisis of October 2008. The primary causes for the fall include the strengthening of the US dollar, the Reserve Bank of India’s (RBI) intervention to protect the rupee, and declining gold prices.

RBI’s Dollar Sales: To curb volatility in the foreign exchange market, the RBI has been selling dollars to defend the rupee, which has faced downward pressure due to the US Federal Reserve’s rate cut cycle since September 2024. The rupee depreciated 0.46% against the dollar in November so far.

Strengthening of the US Dollar: The US dollar strengthened significantly post the US presidential election, which exacerbated the pressure on emerging market currencies, including the rupee. The dollar index, which had been around 103-104, surged to 107.5 during the review period.

Rising Imports and Falling Exports: With increasing imports and less coverage of receivables by exporters, dollar purchases outpaced sales.

Gold Price Drop: International gold prices fell by 4.5%, contributing to the decline in reserves, as a large portion of India’s reserves is held in gold.

US Election Impact: Post-election foreign investor withdrawals and stronger dollar dynamics led to a decline in forex reserves, especially with a weakening of the euro and GBP against the dollar.

Foreign Investment Outflows: Foreign institutional investor (FII) outflows from both equity and debt markets also contributed significantly to the forex reserves drop.