Fall in India’s forex due to appreciating US dollar

According to Union Finance Minister Nirmala Sitharaman, the drop in India’s foreign exchange reserves is mostly the result of valuation adjustments brought on by the strengthening US dollar. Currently, the dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the Euro, and 6% against emerging market currencies since the start of this year. The spike in the dollar began after America’s central bank – Federal Reserve – started raising the interest rate in order to fight high inflation in the US. 

In the past few months, many countries have tried to arrest the decline in their currency by selling dollars. India’s forex reserves have now plummeted to 532 billion dollars from the record high of 642.45 billion registered on September 3, 2021. 

According to the IMF, rising US interest rates and better terms of trade are currently the two main contributors to the dollar’s strengthening. Since higher returns are guaranteed by growing interest rates, investors around the world have recently been purchasing billions of dollars’ worth of U.S. bonds.

 This increased demand has driven up the value of the dollar while decreasing the value of other currencies that were sold to buy dollars. Investors have sought sanctuary in the relative safety of the U.S. dollar, which is less vulnerable to some of the greater macro headwinds, because of its reputation for being a safe haven in times of economic turmoil.