India’s foreign exchange reserves recorded its second steepest weekly fall in a decade, shedding nearly $10 billion in aggregate or 1.5 percentage points, as the central bank sold the greenback to prevent the rupee’s rout. The interventions were aimed at mitigating the impact of equity sales by overseas investors amid rising crude oil prices, and the palpable threat of a widening current account gap.
Also, a dedicated dollar-swap auction of $5 billion, conducted on March 8, is likely to have added to the decline.
Total forex reserves were at $622.2 billion for the week ended March 11, compared with around $632 billion a week earlier, showed Reserve bank of India (RBI) data.
This is the second sharpest weekly drop in over a decade. The gauge tanked 11.9% on March 20, 2020, showed Bloomberg data compiled by ETIG.
“The considerable FX reserves accumulated by RBI in the last few years have clearly helped in the financial markets stability in such uncertain times,” said Ashhish Vaidya, managing director at DBS India.
The reason behind the drop can be attributed to the central bank market interventions and the sell-buy swap window, he said.
Foreign currency asset reserves plunged $11.1 billion while gold reserves rose $1.5 billion. This made a net contraction of $9.6 billion.
“The RBI has enough firepower to arrest any drastic fall in the rupee’s value,” said Anindya Banerjee, currency analyst at Kotak Securities. “The latest drop reflected the impact of the central bank intervention. The rupee seems to be stabilising now.”
Through the dedicated sell-buy dollar window, the central bank sold dollars in the spot market at a specified rate only to buy from the forwards. It will have simultaneous forwards with the same entity. A bank participating in such an auction window will return the dollars after two years, the contract period offered by the RBI via this window.
On March 7, the rupee hit a lifetime record low of 76.97, Bloomberg data showed. The unit touched as much as 77.11 on the same day, showed data from the Clearing Corporation of India.
In between the rupee has been showing signs of stabilising. The local currency gained 0.61% to 75.81 per dollar on Thursday.
During this year, overseas portfolio investors net sold over $15 billion in equities and net of about $600 million in debt securities.
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