The Indian rupee has not lost its value as quickly as some other countries’ currencies, and we have more money saved up in our foreign exchange reserves than we did back in 2013. This means that there is still some space for the rupee to drop in value a bit more.
Right now, the Reserve Bank of India’s (RBI) forex reserves adequacy ratio is at 236%. This is down from 266% in September 2024, when our reserves reached a record $705 billion. However, this 236% is still much better than the 176% we had during a tough time in 2013, according to a study by Nomura.
Nomura looked at four different ways to manage exchange rates, and India’s reserves are the highest among other emerging Asian countries (excluding Japan), which is a good sign!
Recently, a study from Bank of Baroda showed that global currencies have been under pressure since November 1, 2024, right before the US elections, until January 10, 2025. During this period, some currencies dropped in value—like the South African Rand by 7.6% and the Thai Baht by 2%. In comparison, the dollar rose by 5.1%, but the Indian rupee only dropped by 2.2%, which is not too bad.
However, if our forex reserve adequacy ratio goes below 180%, it could become a problem. Back in 2013, when we had to deal with a tough balance of payments situation, it hit a low of 176%, which led the RBI to take action to help the rupee by bringing in more external funds.
Nomura mentioned that if we get down to a forex reserve adequacy ratio of 176%, that would mean our reserves would drop to $407 billion, which is $138 billion less than what we have now. This situation would allow the Reserve Bank to sell dollars until reserves reach that $407 billion mark.
Economists believe that even if the rupee drops by 20-30 paise, it could still be okay. The financial situation in India has tightened a bit since September 2024, but it’s still stable compared to tougher times like during the 2008 financial crisis or the 2020 COVID-19 pandemic.
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