Global foreign currency reserves have declined by about USD 1 trillion i.e, 7.8 percent this year to USD 12 trillion which is the biggest drop since Bloomberg started to compile the data 2003.

The reserves are falling at a fast pace on record as central banks from India to the Czech Republic intervene to support their currencies.

The reason for the fall is simply due to the changes in valuation. The dollar jumped to twenty decades high against other reserve currencies like the Euro and Yen, it reduced the dollar value of the holdings of these currencies. But the dwindling reserves also reflect the stress in the currency market that is forcing a growing number of central banks to dip into their war chests to fend off the depreciation.

India’s stockpile for example has fallen from USD 96 billion this year to USD 538 billion. The country’s central bank said asset valuation changes account for 67 percent of the decline in reserves during the fiscal year from April, implying the rest came from intervention to prop up the currency. The rupee has lost about 9npercent against the dollar this year and hit a record low last month.

Japan has also spent about USD 20 billion in September to slow the Yen’s slide in its first intervention to support the currency since 1998. That would account for about 19 percent of the loss of reserves this year. A currency intervention in the Czech Republic helped drive down reserves there by 19 percent since February.

While the magnitude of the decline is extraordinary, the practice of using reserves to defend currencies isn't anything new. Central banks buy dollars and build their stockpiles to slow currency appreciation when foreign capital floods in. In bad times, they draw on the reserves to soften the blow from capital flight.

“Some countries, notably Asia, can go both ways, smoothing weakness and pockets of strength,” said Alan Ruskin, Chief International Strategist at Deutsche Bank AG. Most of the central banks still have enough fire to keep interventions going, if they chose to. Foreign reserves in India are still 49 percent higher than the levels of 2017 and enough to pay for nine months of imports.

But for others, they are quickly depleting. After declining by 42 percent this year, Pakistan’s USD 14 billion of reserves are not enough to cover three months of imports, data compiled by Bloomberg show.

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