What has flipped the forex reserve decline of India?

livemint.com:

RBI. Dollar appreciated after the US Fed hiked rates and India’s balance of payment (BoP) saw lower net capital inflows. This trend reversed with the dollar index peaking last October as expectations of further Fed rate hikes waned.

Forex reserves jumped this year primarily due to revaluation gains as the dollar weakened and capital flows rose. Also, oil imports from Russia are not settled in dollar, which has also added reserves. Rate hikes in the US trigger an inflow of foreign investments to the US treasury and, simultaneously, an outflow of capital from India.

The US Fed has hiked rates by 75 basis points so far this year. Expectations are that the Fed may deliver a final rate hike of 25 basis points when it meets this week. This could increase capital inflows into emerging markets such as India.

Also, there is a significant improvement in BoP with current account deficit now projected at less than 2% of GDP. There is resumption in equity capital flows with India continuing to attract maximum flows among emerging market peers. India stands fourth among countries with the highest forex reserves.

China, Japan and Switzerland are the top three, respectively. Most countries, barring India, run large and persistent current account surpluses since they have a competitive exports market. India, Brazil, and the US have built reserves through capital flows instead of huge current account surplus.

The RBI’s forex reserves refer to the assets the central bank holds to provide import cover and protect against external shocks. It has four components: foreign currency assets, gold, special drawing rights and reserve position in the IMF. RBI revalues these assets every week.