India’s RBI uses about half of FX buffer raised to support rupee

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RBI uses FX buffer for rupee

Highlights

RBI has used an estimated $75 billion to $80 billion in spot market intervention and swaps since June 8, cutting reserves to $734.6 billion as of October 2.
Rupee faces intensified pressure from high oil prices, rising U.S. Treasury yields, and persistent foreign equity outflows, prompting RBI to step up interventions, including a special dollar window for oil companies.
Analysts warn the decline in usable reserves—after adjusting for forward shorts and gold—raises doubts over RBI's capacity to defend the rupee, with 97 per U.S. dollar seen as an intervention threshold.

Intervention strategy and reserve drawdown

As reported by Reuters, economists and foreign-exchange traders at six banks say the Reserve Bank of India’s spot dollar sales and dollar-rupee sell/buy swaps are driving the reduction in the forex buffer built earlier this year. Those swaps are also aimed at absorbing surplus rupee liquidity in the banking system while supporting the local currency.

Three economists estimate the RBI has used roughly $75 billion to $80 billion through spot market intervention and swaps since the special measures took effect on June 8. Their calculations adjust weekly foreign-exchange reserve data published by the RBI to strip out valuation changes.

India’s foreign-exchange reserves fell to $734.6 billion through October 2, down about $51 billion from their peak in the first week of September. At the end of September, the RBI’s net forward dollar liabilities stood at about $200 billion, while its gold holdings were valued at $106.4 billion through October 2.

The intervention estimates broadly match the views of traders at banks active in spot and swap transactions, based on market discussions and internal models. The Reserve Bank of India did not immediately respond to a request for comment.

Market pressure and implications for the rupee

Pressure on the rupee has intensified as elevated oil prices, a recent rise in U.S. Treasury yields and persistent foreign equity outflows weigh on the currency. The RBI is stepping up intervention to limit broader risks to inflation and financial stability that could follow a sharper weakening in the rupee.

Last weekend, the central bank introduced measures designed to directly reduce dollar demand. It opened a special window for oil companies to buy dollars from the RBI instead of the open market, and it imposed cash margin requirements on certain forward dollar purchases to make currency hedging costlier for importers.

Analysts at brokerage Ambit said the fall in usable reserves, after adjusting for forward short positions and gold, has become noticeable and could trigger doubts about the RBI’s capacity to defend the rupee if the decline continues. Ambit also said the RBI has repeatedly taken major steps when the exchange rate nears 97 per U.S. dollar over the past six months, indicating that level is acting as an implicit tolerance threshold.

In our earlier coverage of the IMF’s updated Asia-Pacific outlook, we explained that regional growth is expected to cool over the next two years as higher energy prices and tighter financial conditions weigh on activity. We also noted the IMF’s warning that rising global yields could amplify volatility in exchange rates and capital flows across Asia, increasing financial-stability risks for emerging markets.

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