India’s foreign exchange reserves fell for a seventh straight week to $719.75 billion. The decline came from a lower value of gold holdings, not dollar sales. Foreign currency assets actually rose, which suggests the RBI’s new measures to support the rupee are reducing how much it needs to sell.
India’s foreign exchange reserves fell by $1.269 billion to $719.748 billion in the week ended 23 October, according to RBI data released on Friday. It was the seventh straight weekly decline. Reserves are now about $66 billion below the record of $785.71 billion reached in early September.
The headline looks negative. The details are better.
Gold fell, dollars rose
Most of the decline came from gold. The value of India’s gold reserves fell by $2.65 billion to $103.15 billion as global gold prices eased during the week.
Foreign currency assets, the largest part of the reserves and the part the RBI uses to defend the rupee, rose by $1.358 billion to $593.205 billion. Special drawing rights rose slightly to $18.605 billion, while India’s reserve position at the IMF dipped to $4.787 billion.
That matters. When the RBI sells dollars to support the rupee, foreign currency assets fall. They rose this week, which means the RBI was not a large net seller, and may have been a buyer, even with the rupee near 95 to the dollar.
Why the RBI is selling less
The likely reason is the set of measures the RBI introduced this month to reduce pressure on the rupee without spending its reserves.
The main one is a special dollar facility for the three state-owned oil companies, IOC, BPCL and HPCL. Their crude purchases had been one of the largest sources of dollar demand in the market. Now they can buy dollars directly from the RBI, which removes that demand from the spot market and reduces pressure on the rupee.
The RBI has also limited banks’ net open positions in the rupee to $100 million and tightened rules on banks’ foreign exchange derivatives. Those steps limit speculation against the rupee.
The approach is to manage the currency through rules and targeted channels rather than large dollar sales. If it continues to work, the rupee can be defended without much further loss of reserves.
Context
Even after seven weeks of declines, India’s reserves are higher than a year ago and about $28.6 billion above their end-March level. At about $720 billion, they cover roughly 10 to 11 months of imports, well above the three months generally considered adequate.
Part of the earlier peak was temporary. The September record was boosted by inflows from a special concessional swap on deposits from Indians abroad, so some of the decline since then is that money moving back out rather than the RBI defending the rupee.
The risks
The main risk is oil. Brent rose more than 2% on Friday, and a US strike on Iran after Tuesday’s election could push it higher. Every $10 rise in oil adds about $12–15 billion a year to India’s import bill. The oil companies’ dollar facility shifts that pressure from the market to the RBI, but the RBI still has to supply the dollars.
This week’s data shows the RBI’s approach is working for now. The real test will come if oil rises sharply again.
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