India’s foreign exchange reserve slumped $11.98 billion during the week ended March 20 to $469.9 billion. The last time that we saw such a huge fall in reserve was during the global financial crisis in 2008.
Forex reserve had dipped by $15 billion during the week ended October 24, 2008, when foreign investors pulled out huge amounts from the emerging markets on near collapse of major US financial institutions on account of a crisis in the US sub-prime market.
The increased risk aversion on account of the fallout of the new corona virus disease ( COVID-19), that is emerging as a global Pandemic has resulted in foreign investors pulling out from the emerging markets including India
It is estimated that they have pulled out close to $15 billion from the Indian markets in three weeks of March and nearly $6 billion during the week ended March 20 as the stock markets lost the most in value during the week.
Foreign exchange dealers said that the central bank had to sell dollars to defend the rupee which has lost nearly 3 per cent in value in the last three weeks. Economists said that the central bank has enough reserved and could sell upto 30 billion without unduly disrupting the external sector balance sheet as it had piled up reserve worth $63 billion in the last one year.
The Reserve Bank has also unveiled measures to ensure dollar liquidity in the market as foreign investor sell-off is expected in the coming weeks.
India’s foreign exchange reserves comprises both gold and a host of foreign currencies, expressed in dollars. The value of central bank’s stock of gold eroded by $1.6 billion during the week weak as the COVID-19 concerns and its potential impact on the global economy, also derailed commodity prices including crude and other metals including bullion prices. While the value of all currencies in the forex kitty expressed in dollars dipped by $ 10.2 billion.
Forex reserves is expected to drain further in the subsequent weeks as major financial markets fell sharply with investors rushing to park their money in safe haven assets such as the US treasury.