India's Forex Reserves Jump $10.5 Billion to $692.87 Billion, Highest in Two Months

India’s foreign exchange reserves rose by $10.51 billion to $692.87 billion in the week ended July 31, the highest level in over two months, data from the Reserve Bank of India showed Friday. The weekly gain was the largest since January 30, according to Business Standard.

The increase followed a $6.1 billion rise in the previous week, when reserves stood at $682.35 billion. The country’s forex kitty hit an all-time high of $728.49 billion in the week ended February 27 before declining over subsequent weeks as the central bank sold dollars to curb excessive rupee volatility amid heightened geopolitical tensions in the Middle East.

Foreign currency assets (FCAs), the largest component of reserves, climbed $8.75 billion to $564.68 billion during the reporting week. FCAs, expressed in dollar terms, include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in the reserves. Gold reserves rose $1.69 billion to $104.74 billion.

Special Drawing Rights (SDRs) with the International Monetary Fund increased by $48 million to $18.67 billion. India’s reserve position with the IMF also rose by $28 million to $4.78 billion, according to the RBI data.

**RBI Dollar Purchases and Revaluation Gains**

Market participants attributed much of the increase to actual dollar buying by the central bank, combined with revaluation gains from a weakening dollar. Business Standard reported that the RBI bought around $4.1 billion during the week, citing estimates from market participants. The remainder of the FCA increase was attributed largely to revaluation gains. Gold reserves also reflected revaluation gains, they said.

“Based on our estimates, the RBI’s net dollar purchases were around $4.1 billion, while the rest of the increase in reserves was largely due to revaluation gains, including from gold. The $4.1 billion represents actual dollar buying,” Gaura Sen Gupta, economist at IDFC First Bank, told Business Standard.

**Capital Inflows and Swap Mechanics**

The reserve build-up comes on the back of measures by the central bank and government to attract foreign exchange inflows, including the FCNR(B) deposit scheme launched last month. Business Standard reported that total inflows through FCNR(B), external commercial borrowings (ECB) and overseas foreign currency borrowings (OFCB) stood at around $40.8 billion as of July 31.

NDTV Profit reported that the country has so far received $32 billion under the schemes, as per reports.

However, only about half of these flows appear to have translated into actual dollar purchases by the RBI, Business Standard said, citing market participants. The RBI has been allowing its existing forward positions to mature and has also been selling dollars in the spot market to contain rupee depreciation, they said. There is also a lag in the swap process, as banks have designated days each week to access the RBI swap window.

“For instance, when FCNR(B) dollars come into a bank, there can be a delay of a few days before the bank can swap them with the RBI, as each bank has a designated day in the week for accessing the swap window. Therefore, not all the inflows received by July 31 would necessarily have been swapped with the RBI by that date,” a market participant told Business Standard.

During the current month, the central bank has resumed dollar purchases amid sustained foreign exchange inflows, helping rebuild the reserves after weeks of intermittent sales to defend the rupee.

The Economic Times noted that Prime Minister Narendra Modi has since May 11 repeatedly urged citizens to help conserve foreign exchange by reducing discretionary overseas travel, cutting fuel consumption and refraining from buying gold for a year.