The increase in foreign funds over the week was mainly due to an increase in the value of gold assets held by the central bank. Gold reserves rose $1.016 billion to $36.480 billion in the week, according to central bank data.
After a volatile end to the financial year, the central bank’s foreign exchange reserves grew steadily in the first five weeks. The Forex Kitty is just below the all-time high of $590.18 billion set in January 2021.
Meanwhile, the central bank’s foreign currency assets (FCA), which constitute a significant component of total reserves, rose too sharply over the period. FCA rose $434 million to $546.493 billion, the data showed.
The FCA reflects the appreciation or depreciation of currencies such as the euro, pound and yen held in foreign exchange reserves expressed in dollars. Typically, the FCA value for any given week is a function of currency depreciation and also the RBI’s intervention in the FX market.
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The Special Drawing Rights (SDR) at the International Monetary Fund (IMF) – another component of the Forex Kitty – fell marginally by $4 million to $1.503 billion.
The reserve position at the IMF also saw a modest decline of $1 million from the previous week to $4.989 billion, the data showed.
The increase in foreign exchange reserves is typically a factor in the increase or decrease in portfolio investment by offshore investors and also in foreign direct investment (FDI) growth during the period. The purchase of gold reserves by central banks also affects the foreign exchange spot.
A strong kitty allows the central bank to intervene in futures and spot FX markets in time to stem any decline in rupee depreciation.
The central bank of India has been strengthening its foreign exchange reserves for over a year, overtaking Russia and South Korea as the fourth-largest holders of foreign exchange reserves behind China, Japan and Switzerland.