India's Forex Reserves Drop $12.95 Billion as RBI Steps Up Rupee Defense

India’s foreign exchange reserves fell by $12.95 billion to $734.6 billion in the week ended October 2, marking a fourth consecutive weekly decline, according to data released by the Reserve Bank of India on Friday. The reserves had dropped by $18.34 billion to $747.56 billion in the prior week ended September 25.

The latest decline was driven by a sharp fall in foreign currency assets and gold reserves. Foreign currency assets, the largest component of the reserves, decreased by $10.7 billion to $604.7 billion. Gold reserves fell by $2.3 billion to $106.4 billion. Special drawing rights rose by $15 million to $18.7 billion, while India’s reserve position with the International Monetary Fund declined by $15 million to $4.8 billion, according to RBI data.

The reserves have now shed $51.1 billion from a record high of $785.7 billion reached in the week ended September 4, as reported by Business Standard. That record level was built on heavy inflows from a special concessional foreign exchange swap window for diaspora deposits, which opened on June 8 and closed on August 31. The window had mobilized $143.6 billion in foreign currency inflows by September 18, with deposits under the foreign currency non-resident (bank) facility accounting for $132.98 billion of that total.

Despite the drawdown, RBI Governor Sanjay Malhotra said earlier this week that India retains import cover of about 11 months and reserves equivalent to 94.4% of its external debt, according to Business Standard.

Market participants attribute the recent decline to a combination of RBI intervention and valuation losses on foreign currency and gold holdings, Business Standard reported. The central bank is estimated to have net sold about $30 billion in foreign exchange during September, with the remainder of the decline reflecting revaluation losses, according to market estimates cited by the publication. Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimated that the RBI sold about $7.5 billion during the latest reported week, with the balance largely due to valuation effects.

Valuation losses stemmed from movements in non-dollar currencies and gold prices. Foreign currency assets, reported in dollar terms, reflect changes in the value of holdings denominated in euros, pounds, and yen. Gold reserves were affected by a 2.5% decline in bullion prices during the reported week to $4,177 an ounce, while the dollar index rose 1.12% to 102.10, Business Standard reported.

The rupee has fallen 1.62% against the dollar since the beginning of September, reflecting sustained pressure from external outflows and higher oil prices. “The Brent crude is trading above $100 per barrel, and the outflows are continuing, which has put pressure on the rupee,” a dealer at a state-owned bank told Business Standard. The RBI is intervening to prevent the currency from touching 97 to the dollar, the dealer added.

The central bank has used spot and forward market transactions as well as dollar-rupee sell/buy swaps to curb excessive volatility, Business Standard reported. The latest streak of declines follows a sharp recovery after reserves fell to $666.9 billion in the week ended June 26, when the RBI sold dollars amid the West Asia crisis.

Economic Times reported that the reserves had touched an all-time high of $785.70 billion for the week ended September 4 on the back of heavy inflows from the special swap facility. The previous week’s decline of $18.34 billion was a record weekly drop.