India overtook Russia to become the nation with the fourth-largest foreign exchange reserve despite a drop in its international investments in dollar terms.
While India’s forex holdings fell by $4.3 billion to $580.3 billion as of March 5, Russia’s drop was even sharper, resulting in its numbers coming down to $580.1 billion according to data from Bloomberg.
According to data released by the RBI on Friday, after rising by $689 million during the last week of February to a record $584.5 billion, the central bank’s foreign holdings fell in the first week of March.
The forex reserve rises when the RBI buys dollars to prevent a sharp appreciation of the domestic currency. The rupee had come under pressure on February 26 following a surge in government bond yields worldwide, closing 104 paise lower. When the currency comes under pressure, the RBI ends up selling its forex reserve to defend the rupee.
A high forex reserve gives the RBI more leeway in maintaining monetary policy. According to a report by ICICI Securities, the RBI has added $130 billion in forex reserves (spot and forward markets) in the last 12 months and part of these can be spent to ensure stability in forex and interest rate markets.
