Effect of diminishing Forex Reserves of Emerging Asian Economies

Effect of diminishing Forex Reserves of Emerging Asian Economies

Forex reserves are the assets held by the Central Bank of a country which are denominated in a foreign currency. These reserves generally include bank notes, deposits, bonds, treasury bills and other government securities. The main reason to build reserves is to use it as a cushion or as a backup in case of a sudden depreciation in the value of the domestic currency.

Off late, we have been witnessing a lot of discussions and research papers on dwindling forex reserves of Asian emerging economies and shrinking elbow room for those central banks to use reserves to contain the depreciation of their respective domestic currencies.

Major Asian emerging economies like Thailand, Malaysia, India, Indonesia, Philippines, South Korea have seen a considerable decline in their reserves as they have been dependent on their FX reserves to protect their respective domestic currencies against the resurgence of the greenback due to geopolitical uncertainties and the aggressive monetary policy by the US Federal Reserve. Below are two charts which depict a comparative picture of movement in USDINR and India’s Forex Reserves from end of 2021 till August 2022:

It is very much evident that USDINR price and FX Reserves have been on an opposite journey since the end of 2021. As per a recent report by Standard Chartered, India is estimated to have reserves to cover nine months of imports and yet not reached an alarming level. Further, post the recent US inflation data which printed at 8.3% which is still way off the targeted level of 2%, Federal Reserve will continue its aggressive stance and we are likely to witness few more rate hikes in the coming future.

All the above facts draw a common picture of a possibility that currency markets will see a lot movement both sides and volatility would be on a higher side. Though a depreciating Indian Rupee is expected to boost our exports, both importers and exporters would like to see a steady domestic currency with a lesser rate of volatility.

Having said that, it is beyond anyone’s control and the price movement of USDINR purely depends on the market forces and economic factors. But, corporations have a choice to digitize their treasury operations and to shift from spreadsheets to a robust and state-of-the-art Treasury Management System provided by IBSFINtech which empower corporations to manage currency exposure, commodity exposure, Money Market and Investments, Trade Finance Operations, Liquidity & Cash Management and Hedge Accounting which is powered by Refinitiv Data & Analytics.