Big drop of two years in forex reserve, know what is the reason

The country’s foreign exchange reserves are at a two-year low. India’s foreign exchange reserves fell by $9.64 billion to $622.275 billion during the week ended March 11, 2022. The reason for this was that selling by foreign portfolio investors (FPIs) led to rise in crude oil prices and sharp depreciation of the rupee against the US dollar. This was followed by a fall of $ 11.98 billion in Forex during the week ended March 20, 2020. This is the biggest drop in almost two years when FPIs withdrew their money during the Covid-19 pandemic.

After Russia-Ukraine fighting intensified, rupee fell below 77 level and crude oil prices rose, Reserve Bank of India (RBI) sold dollars to prevent further fall in value. With the intervention of RBI, PSU banks started selling dollars when the rupee crossed the level of 76 to 77. RBI sold $5.135 billion on March 8 and also agreed to buy back the dollar at swap-settlement time. When the central bank sells dollars, it withdraws the equivalent amount in rupees, reducing the liquidity of the rupee in the system.

Dollar inflow into the market strengthened the rupee, which had reached 77 points against the dollar on March 8. On March 17, the rupee had risen by 41 paise to 75.80/81 against the dollar on Thursday (March 17). Putting heavy pressure on the rupee, foreign investors pulled out Rs 41,617 crore in March. This has happened after withdrawal of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, FPIs have withdrawn Rs 225,649 crore (excluding FPI investments in IPOs) with effect from October 1, 2021. Because they mainly feared a hike in interest rates by the US Federal Reserve.

Moreover, as the Russo-Ukraine War intensified, Brent crude prices rose to a 14-year high near $140. Since India imports about 80 per cent of its domestic requirements, high crude oil prices also lead to a huge increase in the dollar requirement. According to Motilal Oswal, India is the fourth largest foreign exchange country in the world. The central bank uses its FXR as a cushion during sudden and big shocks in the rupee and this is exactly what happened.