India's forex reserves drop $12.95 billion to $734.6 billion, fourth weekly decline as RBI steps in to defend rupee

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 (RBI). The drop came as the central bank stepped up dollar sales to contain pressure on the rupee, and was partly driven by valuation losses on foreign currency assets and gold holdings.

Reserves have now declined by $51.1 billion since reaching a record $785.7 billion in the week ended September 4. The latest decline followed a record weekly drop of $18.34 billion in the prior week ended September 25, when reserves fell to $747.56 billion.

Foreign currency assets, the largest component of reserves, fell by $10.7 billion to $604.7 billion, as reported by multiple sources. Gold reserves declined by $2.3 billion to $106.4 billion. Special Drawing Rights rose by $15 million to $18.6-18.7 billion, while India's reserve position with the International Monetary Fund fell by $15 million to $4.8 billion, according to RBI data.

### Central bank intervention amid crude surge, outflows

Market participants attributed the slide to a combination of RBI intervention in the foreign exchange market and valuation losses, according to Business Standard. 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.

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, as reported by Business Standard. The decline in gold reserves was also driven by revaluation losses, she added.

The rupee has fallen 1.62 percent against the dollar since the beginning of September, reflecting sustained pressure from external outflows and higher crude oil prices. Brent crude was trading above $100 per barrel, a dealer at a state-owned bank told Business Standard, adding that the RBI was intervening to prevent the currency from touching 97 to the dollar.

The RBI has used spot and forward market transactions as well as dollar-rupee sell/buy swaps to curb excessive volatility in the currency. Swaps earlier in the year helped replenish reserves while absorbing excess rupee liquidity from the banking system.

### Valuation headwinds from gold, dollar moves

Valuation effects have weighed on headline figures. Foreign currency assets, reported in dollar terms, reflect changes in the value of non-dollar currencies such as the euro, pound and yen held in reserves. Gold holdings are similarly affected by shifts in international bullion prices.

Gold prices fell 2.5 percent during the reported week to $4,177 an ounce, while the dollar index rose 1.12 percent to 102.10, as cited by Business Standard.

### Reserves still provide robust cover despite drawdown

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

The earlier buildup in reserves was significantly aided by a concessional foreign exchange swap window that opened on June 8. By September 18, the window had mobilized $143.6 billion in foreign currency inflows, with the bulk — $132.98 billion — coming through the foreign currency non-resident (bank), or FCNR(B), facility. That window closed on August 31.

The latest streak of declines follows a sharp recovery in reserves after they fell to $666.9 billion in the week ended June 26, when the RBI sold dollars amid the West Asia crisis.