According to an ASSOCHAM Eco Pulse Study, India is among worst affected emerging countries to have lost foreign exchange reserves as much as 3.5% of its GDP due to currency imbalances in last 4 months triggered by global financial crisis, 2nd only to Russia in BRIC nations.

The ASSOCHAM Study, BRIC FOREX reserves & Global currency imbalances found that, as an aftermath of global financial crisis; exacerbated after collapse of Lehman Brothers in September 2008, international currency imbalances eroded foreign exchange reserves of Russia by a whopping 10 % of GDP, India by 3.5 % of GDP while Brazil managing a smaller decline of 0.4 % of GDP with China actually adding by a magnitude of 1% of GDP, although at a decelerating pace.

It added that in a bid to put breaks to depreciation and devaluation in domestic currencies, monetary authorities intervention by flowing dollars to stem the downward pressure on local currencies has led to massive drainage of international reserves.

Foreign exchange reserves of Russia have fallen by a whopping USD 175 billion since September 2008 followed by India’s decline of USD 43.2 billion. Brazil recorded a moderate decline of USD 6 billion in its international reserves position whilst China adding USD 4 billion again at a diminishing pace. The BRIC together hold about 41% of global foreign-exchange reserves.

Foreign Exchange Reserves in USD billion

Mr DS Rawat secretary general of ASSOCHAM said that “Foreign exchange reserves have gained ever so greater importance in the present global scenario in providing cushion to protect the economy from speculative capital movements. The financial crisis led global currency imbalances are rapidly deteriorating the international reserves position world over.”

Ever since the global financial crisis emanated to take its toll on the Indian economy, Indian rupee has been under strong pressure against the US dollar. The rupee breached the psychological INR 50 level in November 2008 and has been under sustained pressure against the greenback that initiated the RBI to sell dollars to resist the fall in domestic currency. Indian rupee depreciated by 12.58% during September 2008 to January 2009.

An indicative analysis of the Reserve Bank’s policy stance to fend off depressing forces on the Indian Rupee suggests that the heavy volumes of dollar sold by the monetary authority to avoid exchange rate depreciation has led to the rapid depletion of foreign exchange reserves.

From a peak of USD 315.6 billion in June 2008, a plunge of USD 67 billion in India’s foreign exchange reserves to USD 248.6 billion in January end 2009 has been a consequence of RBI’s strong measures to stem the global pressures on the Indian currency via draining US dollars to support the domestic currency.