India's foreign exchange reserves fell by $2.6 billion to $682.13 billion as of November 1, data released by the Reserve Bank of India (RBI) showed on Friday.
However, gold reserves, which form part of the foreign exchange kitty, increased by $1.2 billion to $69.8 billion during the week, according to the central bank.
There has been a surge in gold buying amid geo-political tensions. According to industry experts, gold is now acting as a hedge against US economic sanctions too, traditionally being a safe haven asset and as a hedge against inflation. Despite inflation being moderated, gold has rallied to new highs. The share of gold in the country's forex reserves has also surged more than 210 per cent since 2018.
India’s foreign exchange reserves had soared to an all-time high of $704.885 billion at the end of September taking the country to the 4th position globally after China, Japan, and Switzerland in the size of its forex kitty. The country’s forex reserves have overall gone up by $34.5 billion in the current financial year which is sufficient to cover imports for 11.2 months based on the balance of payments, according to the RBI. This reflects the strong macroeconomic fundamentals of the economy.
The RBI uses the forex reserves to control the volatility in the rupee which results as hot money from the stock market flows out when foreign investors sell shares. The RBI releases dollars in the market in case the rupee falls sharply to prevent it from going into free fall. This helps to maintain stability in the Indian currency. Robust foreign exchange reserves help to make these operations easier and strengthen the rupee.
Meanwhile, Reserve Bank Deputy Governor Rabi Sankar said at a media event on Thursday that the RBI is well equipped to handle excessive exchange rate volatility that could result as a fallout of the Donald Trump presidency. He also ruled out allowing oversight rights of the Indian bond clearing platform to the European authorities, comparing such a provision to a sovereignty breach.
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