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 as the central bank stepped up dollar sales to contain pressure on the rupee amid surging crude oil prices.
Reserves have shed $51.1 billion since reaching a record $785.7 billion in the week-ended September 4. Despite the recent drawdown, India retains import cover of about 11 months and reserves equivalent to 94.4 per cent of its external debt, Reserve Bank of India (RBI) Governor Sanjay Malhotra had said earlier this week.
The concessional foreign exchange swap window, which opened on June 8, had helped in mobilising $143.6 billion in foreign currency inflows by September 18, contributing significantly to the earlier buildup in reserves. Deposits under the foreign currency non-resident (bank), or FCNR(B), facility accounted for the bulk of the inflows, at $132.98 billion, but this window closed on August 31.
Market participants attribute the recent decline to a combination of RBI intervention and valuation losses on foreign currency and gold holdings. 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.
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 of the fall largely attributable to valuation effects. The decline in gold reserves was also driven by revaluation losses, she added.
Foreign currency assets, the largest component of the foreign exchange reserves, fell by $10.7 billion to $604.7 billion in the week to October 2, according to RBI data. Gold reserves declined 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 fell by $15 million to $4.8 billion.
The rupee has fallen 1.62 per cent against the dollar since the beginning of September, reflecting sustained pressure from external outflows and higher oil prices. The RBI has intervened through spot and forward market transactions to curb excessive volatility in the currency. It has also used dollar-rupee sell/buy swaps, which helped replenish reserves earlier in the year while absorbing excess rupee liquidity from the banking system.
“The Brent crude is trading above $100 per barrel, and the outflows are continuing, which has put pressure on the rupee,” said a dealer at a state-owned bank. The RBI is intervening to prevent the currency from touching 97 to the dollar, the dealer added.
Valuation effects have also weighed on the headline figures. Foreign currency assets, reported in dollar terms, reflect movements in the value of non-dollar currencies such as the euro, pound and yen held in the reserves. Gold holdings are similarly affected by changes in international bullion prices.
Gold prices fell 2.5 per cent during the reported week to $4,177 an ounce, while the dollar index rose 1.12 per cent to 102.10.
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.
