Why has the forex reserve sunk $44.73 billion in 8 months? (Explainer)

• Foreign exchange reserves down by over $11 billion as US$ emerges stronger against Indian Rupee
• Gold, asset devaluation pulls India's forex reserve down by $2.597 bn

During the week ending April 29, foreign exchange reserves fell by $ 2.69 billion to $ 597.72 billion. As per Reserve Bank of India (RBI) data, currency reserves have decreased by $ 44.73 billion from $ 642.45 billion on September 3, 2021. A drop in foreign currency assets (FCAs), a crucial component of overall reserves, caused the drop. The effect of appreciation or depreciation of non-US units held in reserves, such as the euro, pound, and yen, is also included in the foreign currency assets.

Here are the reasons why it fell

Foreign portfolio investors (FPIs) have withdrawn $ 21.43 billion since September 2021, when the US Federal Reserve began tightening monetary policy and raising interest rates, contributing significantly to the fall in Forex reserves. The biggest drop occurred in March when FPIs withdrew $ 6.56 billion. Apart from the loss of other currencies, the demand for dollars remained high as the Russia-Ukraine conflict resulted in a jump in oil and commodities prices.

The fall in foreign exchange reserves is also due to a value loss, which reflects the US dollar's strengthening versus key currencies, as well as a drop in gold prices. The FCA fluctuates primarily due to the RBI's purchases and sales of foreign exchange, income from the deployment of foreign exchange reserves, receipts of external aid by the Central Government, and changes due to asset revaluation. The rupee fell 57 paise to 76.96, just below the all-time low of 76.97, to end at 76.92 versus the US dollar on Friday, driven down by a strong dollar overseas and firm crude oil prices.