The robust and fastest growing economy witnessed a setback as foreign exchange reserve (forex) slipped to a 10-month low in over a fortnight of the new year. As per the data released by the Reserve Bank of India, forex declined by $8.714 billion to $625.871 billion in the week ended January 10. It is the steepest weekly decline in two years. Unfortunately, this development is being projected by many, including Congress, as a forest fire to threaten the masses for political gains. It is being used to paint the government as incapable to watch over and control the economy. With politicisation, there arise two aspects here, the first being the technicalities and deliberation on the development and the second one is obviously politics.
First let’s come to the political angle. According to Congress and other opposition parties, Modi govt has failed because forex is at a 10 month low and has declined in the last 3 months. Going by their words, three months ago the forex was on rise. For those unversed, in September 2024, India’s forex was at an all time high of $689.235 billion. Would they happily give credit to Modi for taking the forex to all time high? Undoubtedly, the answer is no. It is inarguably true that Congress should be the last to comment on forex as in 2014, when it left power, forex was below $300 billion. Regarding forex, Congress is entitled to get slammed each and everytime it speaks. But giving them that importance is certainly not worth, in fact what’s important is that they want to instill fear in the minds of people to create distrust. That takes us to the other aspect and rather the important one— technicalities and economic equations behind forex fall.
It must be noted here that forex fall has not come upon us as some shocker, it came to us because the RBI sold dollars to stabilize the falling rupee. Forex kitty includes foreign currencies including dollars, gold reserves and others. The recent decline is due to the fall in foreign currency, which is also a major part of the basket. On the other hand, gold reserves have risen in the same time period.
Nevertheless, the RBI closely monitors the forex market and intervenes to buy or sell to contain excess volatility in exchange rates. Recently, INR depreciated to an all time low and to contain its repercussions on the Indian economy, RBI has liquidated dollars to soak Rupee from the forex markets. So the basic question here is the fall of the Rupee and why it has fallen.
INR has a reputation of depreciation because of the nation’s trade deficit feature. But the geopolitical crisis and subsequent rise in oil prices have further destabilised Indian currency since the last two years. Before that it was pandemic. Recently in September the condition of INR improved significantly but Trump’s arrival has made the Dollar strong. So basically it is the Dollar that is becoming strong and not that India has adopted some policy that is hurting it. The US investors are optimistic and are investing in the US because they believe that Trump’s policies on reforms, taxes and tariffs will benefit the US economy. This week, the S&P 500 and Dow Industrials registered their biggest weekly percentage gains since early November and the Nasdaq recorded its best since early December. Since his policies are economically antagonic to the larger world, this optimism in the US economy has affected almost all major currencies.
For instance, the Euro is on a brink of parity with USD given Trump’s policies. Since its establishment, the Euro has only traded at parity in 2022 when the Russia-Ukraine war started and energy crisis mounted over Europe. Since, EU is one of the biggest exporters of luxury cars, purses and other commodities, Trump’s tariff vindication is hurting their currency.
Similarly, the Japanese currency Yen also witnessed depreciation. The Chinese Yuan, on the other hand, breached its threshold of 7.3 per dollar in the first week of January. With year-end is to contain depreciation within 7.5 but there is a fear of a 60 per cent tariff that Trump has threatened and which could subsequently lead to crossing 7.5 per dollar.
Apart from Trump’s arrival, strong USD and positive investor mindset, another big reason for economic revival of USD is the reduction of inflation. Inflation has been a concern for the US for a couple of years but last month it moderated as reports tell. This has also created an optimistic environment.
So eventually, the rise of the US is hurting other economies and their currencies because all are pegged to it. However, the government would have to take some steps to contain the depreciation. No doubt that raising gold reserves is a good move and forex has time and again been used for liquidation to contain depreciation but if Trump delivers what he has promised, India will have to devise an alternative. As Dollar’s effect is unavoidable, India is now in more than ever need to navigate its way for the local currency trade. And when such crucial economic interplay is at the table, the one thing that the government start with is take the least consideration of Congress in it as said earlier, it is the last entity to comment on forex and economy especially when its comments are more guided towards political attacks than the interest of people.
