Global foreign-currency reserves are declining rapidly as the central banks of India and the Czech Republic step in to support their currencies. This year reserves have fallen by around 7.8% ($1 trillion). It is the biggest decline since Bloomberg began gathering data.
Valuation changes have contributed significantly to this downturn. The dollar’s rise to two-decade highs against other reserve currencies, such as the euro and yen, lowered the dollar worth of these currencies’ reserves. However, the shrinking reserves also reflect the currency market stress that is prompting an increasing number of central banks to dip into their war chests to counter devaluation.
For instance, India’s stockpile has fallen by $96 billion this year to $538 billion. According to the country’s central bank, asset valuation changes account for 67% of the fall in reserves for the fiscal year beginning in April, meaning that the rest came through currency intervention. The rupee has fallen by approximately 9% against the dollar this year, reaching a record low last month.
In September, Japan disbursed around $20 billion to control the Yen’s decline as its first step to support the currency since 1998. It would account for around 19% of the loss in foreign reserves this year.
“This is all part of the catalog of symptoms of the canary in the coal mine,” said Axel Merk, chief investment officer at Merk Investments, on the dipping foreign reserves. “Cracks are showing up. And those red flags will come at an increasing pace.”
While the size of the decrease is unusual, utilising reserves to protect currencies is not a new strategy. Central banks purchase and accumulate dollars to prevent currency appreciation as foreign capital flows in. In difficult times, they dip into reserves to cushion the pain of capital flight.
The majority of the central banks have adequate capability to continue the interventions if they want. Indian foreign reserves are still 49% higher than 2017’s reserves and are sufficient to settle the nine months of imports.
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