An unprecedented $1 trillion decline in global cash reserves has occurred

$1 trillion decline in global cash reserves

Global Market
by 5paisa Research Team Last Updated: 2022-10-10T14:51:54+05:30

Global foreign currency reserves are shrinking at the fastest rate ever as central banks from India to the Czech Republic act to defend their currencies.

As central banks from India to the Czech Republic intervene to keep their currencies stable, global foreign exchange reserves are falling at their fastest rate in history.

This year, reserves fell by approximately $1 trillion, or 7.8%, to $12 trillion, the largest drop since Bloomberg began tracking data in 2003.

Why are reserve levels shrinking?

The Fed raising interest rates to combat inflation reduced global currency reserves.
After the Fed raised interest rates several times, individual central banks began to use their foreign exchange reserves to help prevent local currencies from depreciating.

And some of the reduction is attributable to merely valuation changes. When compared to other reserve currencies like the Euro and Yen, the dollar climbed to two-decade highs, reducing the value of these currencies' reserves. The currency market's turbulence, however, is also reflected in the dropping reserves, as more central banks are using their war chests to deplete their reserves to prevent depreciation.

And some of the reduction can be attributed to simple valuation changes. When compared to other reserve currencies such as the Euro and Yen, the dollar has risen to two-decade highs, devaluing the reserves of these currencies. The turbulence in the currency market, on the other hand, is reflected in falling reserves, as more central banks use their war chests to deplete reserves in order to prevent depreciation.


For example, India's stockpile has decreased by $96 billion this year, to $538 billion. According to the country's central bank, asset valuation changes are to blame for 67% of the decrease in reserves over the course of the fiscal year beginning in April, with currency intervention accounting for the remaining 33%. So far this year, the rupee has fallen by about 9% against the dollar, and it hit a new low last month.

According to Alan Ruskin, chief international strategist at Deutsche Bank AG, some countries, particularly those in Asia, can balance their strengths and weaknesses.


Most central banks still have enough firepower to operate if they so desire. India still has 49% more foreign reserves than it did in 2017, enough for nine months of imports.

However, they are quickly running out for others. According to Bloomberg, Pakistan's $14 billion in reserves, which have fallen by 42% this year, are insufficient to cover imports for three months.
 

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Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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