One of the reasons for the decline in foreign currency funds is the decline in foreign currency assets (FCA). Incidentally, FCA is one of the benchmarks for all funds. Along with this, the country’s gold reserves have also decreased. RBI’s Weekly Statistical Supplement published on Friday says so. FCA fell to $2.571 billion from $498.645 billion in the reported week.
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The FCA’s criteria include the appreciation or depreciation of foreign currencies such as the euro, pound, and yen against the dollar. The country’s gold reserves fell to $271 million from $39.643 billion.
Special Drawing Rights (SDRs) declined to $155 million from $17.832 billion. Similarly, the country’s funds in the IMF decreased from $4.926 billion to $10 million.
Incidentally, the price of money relative to foreign currency (the price of foreign currency relative to money) is determined according to the way the price of other products is determined in the market. Foreign currency is needed for foreign trade. To buy goods or services from a foreign country that cannot be settled in money, requires that country’s currency (or, international currency, dollars). Again, if any other country buys a product or service from India, the price has to be quoted in rupees. That is, foreign currency is bought and sold for this transaction. If the situation is such that the demand of dollar in India to meet the price of foreign goods and services is more than the demand of money in the market to meet the price of Indian goods and services, then naturally the price of dollar will rise, i.e. the price of rupee will fall. If so, the cost of goods and services bought in dollar terms — that is, what India imports from abroad — will increase. And that is what is happening.
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However, the Reserve Bank can control the price of money to some extent—by selling dollars in the market from its own funds when the dollar rises; Buy dollars from the market when the price falls. As the Reserve Bank releases dollars into the market, banks’ foreign currency holdings are also dwindling rapidly. But whether the situation can be handled or not, doubts remain. The exchange rate of the rupee is currently a cause of deep concern.