Abstract：India's foreign exchange reserves fell by $2.691 billion to $717.056 billion in the week ended October 30, according to Reserve Bank of India data reported by The Hindu. The decline extends a slide from the all-time high of $785.706 billion reached in the week ended September 4, a peak built on a surge of diaspora deposits.
India's foreign exchange reserves fell by $2.691 billion to $717.056 billion in the week ended October 30, according to Reserve Bank of India data reported by The Hindu. The decline extends a slide from the all-time high of $785.706 billion reached in the week ended September 4, a peak built on a surge of diaspora deposits.
ContentsA Record Built on a Deposit Scheme
The September peak followed heavy inflows under a special concessional swap arrangement for deposits from the Indian diaspora. Banks raised a record $133 billion through that scheme, and the dollars flowed into the reserves. Since then, the reserves have moved steadily lower.
The drawdown has continued week after week. In the week ended October 24, reserves fell by $1.269 billion to $719.748 billion, and the following week's $2.691 billion drop took the total to $717.056 billion. The Economic Times put the same weekly decline at about $2.6 billion, reflecting rounding.
For a forex beginner, reserves are the central bank's stock of foreign assets, mostly US dollars, that it can use to buy its own currency when it weakens. A larger cushion gives a central bank more room to smooth sharp moves in the exchange rate without running short of dollars.
What Moved Inside the Reserves
Foreign currency assets, the largest component, fell by $2.088 billion to $591.118 billion in the week ended October 30. These assets are reported in dollar terms and include the effect of exchange-rate moves in other currencies held in the reserves, such as the euro, the pound and the yen, so a stronger dollar can lower the reported figure even without any selling.
Gold reserves declined by $559 million to $102.591 billion. Special Drawing Rights, the reserve asset issued by the International Monetary Fund, fell by $47 million to $18.558 billion. India's reserve position with the IMF, by contrast, rose by $3 million to $4.79 billion.
Analysts attribute the broader decline to two forces: the use of funds raised through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, and the RBI's dollar sales to defend the rupee. FCNR(B) accounts are foreign currency deposits held by non-resident Indians with Indian banks, and when those funds are deployed or repaid, they can reduce the reserves.
The Rupee Turns, and the RBI's Next Move
The currency picture has shifted since that data week. The rupee strengthened to a six-month high of 93.70 against the dollar on Monday, November 9, up from Friday's close of 93.9050, according to Kotak Neo. That took USD/INR further below the 94 mark and extended a recovery of more than 3% from a recent record low of around 96.90 per dollar.
In USD/INR, a lower number means fewer rupees are needed to buy one dollar, so a fall in the pair reflects a stronger rupee. The recovery has been helped by a steep drop in crude oil prices, with Brent down nearly 20% in the week before November 9 after US President Donald Trump indicated further attacks on Iran were unlikely while negotiations continued. India imports nearly 90% of its oil, so cheaper crude reduces dollar demand from importers. Overseas investors also bought more than $4 billion of Indian equities in that week.
Anindya Banerjee, Head of Currency and Commodities Research at Kotak Neo, said the rupee's outlook improved after USD/INR broke below its long-standing 94 to 97 range. He sees 93.20 and 92.50 as the next important levels, provided the pair does not close above 94.20, and said his directional bias remains downward in USD/INR, implying further rupee appreciation, unless that happens. He added that continued rupee strength would depend on foreign inflows remaining positive.
The recovery has also focused attention on whether the RBI will buy dollars to rebuild reserves that have fallen from their peak. The central bank has maintained a sizeable short-dollar position in the forward market, according to the report, and stronger inflows could offer a chance to replenish the cushion. RBI dollar purchases would raise demand for the US currency and could slow the rupee's rise.
Traders are watching interest-rate expectations as well. The US economy added 165,000 jobs in October, strengthening expectations of a Federal Reserve rate increase in December, and the dollar index was around 102.2 ahead of US consumer inflation data due on Tuesday, November 10. India's October retail inflation figures are due on Thursday, November 12. A stronger US inflation reading could support the dollar and pressure emerging-market currencies, while softer data could support the rupee.
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