Notable decline in forex reserve because RBI using forex to manage currency volatility: UBI Report

Mumbai: The recent decline in India's forex reserve from $705 billion to $656.58 billion is because the central bank is using forex reserve to manage currency volatility says a report by Union Bank of India.

The report says that the Reserve Bank of India (RBI) is actively working on curtailing currency volatility as persistent dollar outflows have put pressure on the Indian Rupee.

It noted that persistent foreign portfolio investor (FPI) outflows from the equity market have pushed the rupee to record lows. To manage the situation, the RBI has been utilizing its forex reserves, which dropped to USD 656.58 billion as of the week ended November 22, 2024.

It said "Persistent FPIs outflows from equity market has led the Rupee depreciate to record highs. However, our Central Bank is likely curtailing volatility through utilization of Fx Reserves".

This marks a decline of USD 1.31 billion for the week. Notably, forex reserves have fallen by USD 48.30 billion from their peak of USD 705 billion.

The report also sheds light on the government's fiscal position, stating that for the first time since April 2023, the government's balance slipped into Ways and Means Advances (WMA) as of November 15, 2024.

However, it recovered to Rs 1.3 lakh crore by the week ended November 22, 2024. The report attributed this improvement to month-end government spending, which supported liquidity and is expected to bring the system back into a positive zone by early December.

Additionally, the report highlighted the narrowing credit-deposit growth gap in the banking sector. As per the RBI's latest statement of position, deposit growth stood at 11.2 per cent, while credit growth was at 11.1 per cent for the fortnight ended November 15, 2024.

This resulted in the credit-deposit wedge turning back to negative at 6 basis points (bps) after being positive at 15 bps in the previous fortnight.

These developments highlight the RBI's proactive measures to manage liquidity, maintain currency stability, and support the broader economic framework amid ongoing global volatility and domestic fiscal challenges.

However, the Rupee continues to decline with it touching 84.7225 against 1 USD at the time of filing this report.