Despite hitting an all-time low against the US dollar, the rupee continues to be the best performer compared to some of its peers since February. On Thursday, it logged its worst fall in seven months to end at a record closing low of 80.86 against the greenback. Yet, it has managed to outshine the likes of the euro, the ringgit or the yuan thanks to the RBI.

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The Reserve Bank of India (RBI) has been managing the currency impact of factors such as the war between Russia and Ukraine, and the global macroeconomic situation.

The rupee has depreciated 6.5 percent against the greenback during this period, as against the ringgit's fall of 8.5 percent against the US currency. The yuan has shed close to 10 percent of its value, and the euro about 12.7 percent.

India has seen a massive decline in its forex reserves over the last few months. In dollar terms, the forex reserves have declined 12.8 percent since February 2022 to about $551 billion as of September 9, 2022.

So how does it work?

Here's a look at what forex reserves are and how they work:

Forex reserves are the assets held by a nation's central bank or monetary authority. They are generally held in reserve currency, which is usually the dollar, and to a lesser degree the euro, the yen and the pound sterling.

Forex reserves are a true barometer of a central bank's control over adequate foreign assets to meet the nation's objectives.

These objectives may include:

Supporting confidence in the capital market

Helping the government meet its forex needs and external debt obligations

Maintaining a reserve for potential national disasters or emergencies

A lower degree of depreciation in the rupee against the US dollar helps in curbing inflation — by way of the reduced cost of imported goods and materials.

ALSO READ: Rupee sinks to fresh record low against dollar after Fed rate hike

All in all, effective forex management helps in managing policy, giving a boost to imports and even control inflation.

For more, watch the accompanying video

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