India FX reserves extend decline to seven weeks as RBI support operations weigh

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India FX reserves decline

Highlights

India's foreign exchange reserves decline by $1.27 billion for the seventh consecutive week, mainly due to a $2.6 billion drop in gold holdings now at $103.1 billion.
The RBI's foreign currency assets increase by $1.3 billion to $593.2 billion, reflecting both dollar support operations for oil companies and currency valuation changes.
Reserve levels fall from a record $785.7 billion in late August as rupee support operations and previous capital inflows of $143.5 billion create future forward-book liabilities.

Reserve composition and central bank actions

As reported by Reuters, India's foreign exchange reserves fall by $1.27 billion week on week, extending the current losing streak to seven consecutive weeks. The decline is mainly driven by a $2.6 billion drop in the value of the Reserve Bank of India's gold holdings, which stand at $103.1 billion.

At the same time, the RBI's foreign currency assets rise by $1.3 billion from a week earlier to $593.2 billion. Changes in these assets, when expressed in U.S. dollar terms, also reflect currency movements among non-dollar reserve holdings.

Earlier in October, the central bank announces fresh measures to support the rupee, including a special window to meet the daily dollar needs of three state-run oil marketing companies. Under this arrangement, typically used during periods of currency stress, the RBI supplies dollars directly from its reserves.

Pressure from rupee support and earlier inflows

The provision of dollars to oil companies, together with market intervention to support the rupee and dollar-rupee sell/buy swaps used to drain excess rupee liquidity from the banking system, weighs on reserve levels after they reached a record $785.7 billion in late August.

That earlier peak follows policy measures designed to draw capital inflows. Those steps attract $143.5 billion between June 8 and September 18, with nearly $133 billion arriving through foreign-currency deposits.

While those dollar inflows lift the RBI's spot foreign exchange reserves, they also appear as a future liability in the central bank's forward book. India's foreign exchange reserves also include the country's Reserve Tranche position at the International Monetary Fund.

Our earlier article on the RBI’s rupee-defence interventions explained that the central bank had likely deployed $75–$80 billion from the foreign-currency inflows raised via special FX measures introduced on June 8. We noted that spot dollar sales, dollar-rupee swaps and a special dollar window for oil companies helped curb dollar demand but also coincided with a drawdown in reserves and a rise in forward liabilities—raising questions about how much room the RBI has if pressure on the rupee persists.

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