India's forex reserves mark the biggest weekly drop in 11 months

India's foreign exchange reserves fell significantly to a one-month low of $566.94 billion in the week ending February 10, marking its biggest weekly decline in 11 months.

The country's import cover in the week prior had dropped by $1.49 billion to $575.27 billion, stalling a three-week rising streak, according to the Reserve Bank of India's weekly data.

The latest dip in FX reserves was due to the Indian central bank selling dollars to shore up the rupee in international markets and stabilise the domestic currency from extreme volatility.

That trend of the Indian central bank intervening in forex markets to defend the rupee has been a phenomenon over the past year.

But why is this important? What does the foreign exchange of a country signify?

Foreign Exchange Reserves are of crucial importance to the functioning of any economy.

They entail all the foreign assets owned by a country's central bank. Foreign assets generate income in foreign currency.

They are stored in the form of gold or cash and are used to maintain the balance of payment and to maintain the country's financial market stability.

In October 2021, India's forex kitty hit an all-time high of $645 billion; however, the trend has reversed and declined as the Indian rupee fell significantly against the US dollar.

According to the RBI data, India's Foreign Currency Assets (FCS) have also fallen by $7.11 billion to $500.59 billion in the latest week.

The FCA differs from the reserves since it considers the effect of appreciation or depreciation of non-U.S. units such as yen, pounds, and euro.

Apart from that, India's Gold Reserves have fallen by $919 million, taking the bullion reserves to $42.86 billion.

The collective trend over the past year aptly showcases the drop in the rupee against the dollar.

The rupee's dramatic fall

The value of the domestic currency declined for the fourth straight week but did not weaken beyond its record low of a touch over 83 per dollar, which would have likely triggered a response by the RBI.

However, despite all the chaos, the Indian rupee has remained relatively stable compared to its Asian peers.

The RBI Governor said that the volatility in the rupee is better than seen in the past, with India's forex reserves in a comfortable position, despite the fall over the past year.

The broader sell-off of most major global currencies in favour of the dollar has hurt the forex reserves of almost every emerging market country, pushing some into a historic economic crisis.

That trend for increased interest in dollar-denominated assets intensified after Russia invaded Ukraine almost a year ago.

The Indian rupee has not been an exception.

The Indian currency fell to multiple record lows and hovered around 83 per dollar from about 74 per dollar before the war on the edge of Europe started in February last year.

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