Nation’s Forex reserves decline by USD 1 billion to USD 697.93 billion.

India’s forex reserves dropped by USD 1.01 billion to USD 697.93 billion for the week ended June 20, the Reserve Bank of India said on Friday. In the previous reporting week, the reserves had jumped by USD 2.29 billion to USD 698.95 billion. Forex reserves had touched an all-time high of USD 704.885 billion in September 2024.

For the week ended June 20, foreign currency assets, a major component of the reserves, dropped by USD 357 million to USD 589.06 billion, the data released on Friday showed. Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

The gold reserves were down by USD 573 million to USD 85.74 billion during the week, while The Special Drawing Rights (SDRs) declined by USD 85 million to USD 18.672 billion, the apex bank said.

India’s reserve position with the IMF also declined by USD 1 million to USD 4.45 billion in the reporting week, the apex bank data revealed.

Today, the Reserve Bank released data relating to India’s International Investment Position (IIP) for end -March 2025. The Key Features as depicted:

IIP during April-March 2024-25:

• During 2024-25, the net claims of non-residents declined by US$ 31.2 billion on the back of higher rise in India’s external financial assets (US $ 105.4 billion) vis-à-vis external financial liabilities (US $ 74.2 billion).

• Over 72% of the rise in India’s overseas financial assets was due to increase in overseas direct investment, currency & deposits, and reserve assets.

• Inward direct investments, loans as well as currency & deposits accounted for over three-fourths of the rise in foreign liabilities during the year.

• The ratio of India’s international financial assets to international financial liabilities increased to 77.5% in March 2025 from 74.1% a year ago

IIP during January-March 2025:

• Net claims of non-residents on India declined by US$ 34.2 billion during Q4:2024-25 to US$ 330.0 billion as at end-March 2025.

• Higher rise in Indian residents’ overseas financial assets (US$ 60.0 billion) as compared to that in the foreign-owned assets in India (US$ 25.8 billion) led to the decline in net claims of non-residents during the quarter.

• Increase in reserve assets accounted for over 54 per cent of the rise in Indian residents’ overseas financial assets, followed by currency & deposits and direct investments.

• Rise in loans (US$ 10.0 billion) and inward direct investment (US$ 9.7 billion) together accounted for over three-fourths of the rise in foreign liabilities of Indian residents during January-March 2025.

• Reserve assets accounted for 58.7% of India’s international financial assets.

• The ratio of India’s international assets to international liabilities increased to 77.5% in March 2025 from 74.8% a quarter ago.

• The share of debt liabilities in total external liabilities increased during the quarter and stood at 54.8%.

Ratio of International Financial Assets and Liabilities to Gross Domestic Product (GDP):

• As a ratio to GDP (at current market prices), residents’ overseas financial assets increased and external financial liabilities declined during 2024-25 (Table 2).

• The ratio of net claims of non-residents on India to GDP improved to (-)8.7% in March 2025 from (-)10.1% a year ago, and (-)14.1% five years ago.

On a broader perspective, India’s International Investment Position (IIP) and Foreign Exchange (Forex) reserves are interconnected aspects of the country’s external financial health. The IIP reflects the stock of external financial assets and liabilities, while forex reserves are the assets held by the Reserve Bank of India (RBI) to manage the country’s international transactions and maintain currency stability. A healthy IIP and adequate forex reserves are crucial for India’s economic stability and resilience against external shocks.

Here’s a breakdown of their connection:

1. Forex Reserves as a Buffer:

Forex reserves, primarily composed of foreign currency assets, gold, Special Drawing Rights (SDRs), and the reserve position in the International Monetary Fund (IMF), act as a buffer against external vulnerabilities.

These reserves can be used to meet import payments, manage exchange rate volatility, and ensure the country can meet its international financial obligations.

A comfortable level of forex reserves, like India’s which can cover over 11 months of imports, enhances investor confidence and stability.

The RBI can intervene in the foreign exchange market by buying or selling dollars to influence the rupee’s exchange rate and maintain stability.

• IIP and Forex Reserves Relationship:

The IIP provides a comprehensive picture of a country’s external assets and liabilities. It includes foreign direct investment, portfolio investment, loans, and other financial instruments.

A country with a large IIP surplus (more assets than liabilities) generally has a stronger external financial position.

While forex reserves are a component of the IIP, they also play a crucial role in managing the overall IIP and influencing its fluctuations.

For example, if a country experiences a large capital outflow, it may need to use its forex reserves to meet the demand for foreign currency, which can impact both the IIP and the exchange rate.

     3. Key Considerations:

Current Account Deficit (CAD):

A widening CAD can put pressure on forex reserves as the country needs to finance the gap through borrowing or drawing down reserves.

Capital Flows:

Fluctuations in capital inflows and outflows can also affect forex reserves and the IIP. For instance, a surge in capital inflows can lead to an increase in reserves, while a sudden outflow can deplete them.

RBI’s Role:

The RBI plays a critical role in managing forex reserves and the IIP through various policy measures, including intervention in the foreign exchange market, management of capital flows, and influencing interest rates.

External Debt:

The level of external debt and its management are closely linked to forex reserves. Adequate reserves can help a country manage its debt obligations and avoid default.

In essence, India’s forex reserves and IIP are interconnected and play a vital role in maintaining the country’s external sector stability and economic resilience. The RBI closely monitors both to ensure a healthy balance of payments and to manage potential risks arising from global economic uncertainties.

Team Maverick