India’s foreign exchange or forex reserves decreased by $3.007 billion for the week ended August 26 to $561.046 billion, according to the data released by the Reserve Bank of India (RBI).
The reserves in the week ended August 19 saw the withdrawal of $6.687 billion, reaching $564.053 billion.
In the week ended August 26, the reserves shrank mainly because of the tail-off in the foreign currency assets (FCA), an essential component of the overall reserves, and the gold reserves, shows the Weekly Statistical Supplement released by the central bank.
The FCA trimmed by $2.571 billion to $498.645 billion in the reporting week. The FCA counts the effect of appreciation or depreciation of non-US currencies such as the euro, pound, and Japanese yen accommodated in the forex handbook.
The gold reserves declined by $271 million to $39.643 billion, the data showed. The special drawing rights (SDRs) dipped by $155 million to $17.832 billion.
India’s reserve position with the IMF also saw a decline of $10 million to $4.926 billion in the reporting week, the RBI data showed. Falling forex reserves may raise trouble for the union and the RBI in handling the nation’s external and internal financial issues.
Higher reserves provide a financial cushion to a country in the wake of the economic crisis. They help pay the import bill and strengthen the rupee against the dollar.
A rise in reserves boosts market confidence in a country, provides reliability to meet its external obligations, helps the government meet its foreign exchange needs and external debt obligations, and maintains the reserve for unforeseen disasters or emergencies.