The RBI raised its policy rate (repo rate) today by 50 bps from 4.4% to 4.9%, signaling that it is going to aggressively battle inflation. At this juncture, the RBI’s Monetary Policy Committee voted to move away from the ‘accommodative stance’ it had previously held to boost economic growth. This had contributed to increasing inflation, which was already up due to the rise in crude prices.

With a lot of uncertainty on the economic front, foreign institutional investors (FII) pulled out money from the Indian market. According to a report, FIIs pulled out more money from January-May 2022 than they invested in the Indian market in the last 12 years. FII activity in the last 30 days alone shows a net sale in Indian shares of Rs 35,800.7 crore.

This exit hurt India’s foreign exchange reserves. The dip in India’s forex reserves began in March 2022, when they fell 1.5% in seven days to $622 billion. Then on May 13 forex reserves plunged again by 6% to USD 593.3 billion. This is the highest decline in India’s forex reserves since March 04, 2022.

Now, India’s forex reserves are back over the $600 billion mark. This was because of the appreciation of non-US currencies like the euro, pound sterling, and the yen held in foreign exchange reserves. India’s forex reserves are in various global currencies but are denoted in dollars for easy comparison. As the dollar index fell nearly 1.5% against major currencies like the euro and pound, the value of India’s forex reserves in those currencies increased. 

With crude oil rising every week and China’s economy opening up, India’s forex reserves will be closely watched. India imports over 80% of its crude oil - as fuel demand continues to rise, there will be a higher price to pay for imports.