Rupee Weakness Prompts Record $18.34 Billion Dip in India’s Forex Reserves

India’s foreign exchange reserves experienced a record weekly decline of $18.34 billion for the week ending September 25, dropping to $747.56 billion. This sharp decrease reflects the ongoing pressure on the rupee, which has prompted the Reserve Bank of India (RBI) to take decisive action in the foreign exchange market to maintain currency stability.

The significant drop in reserves coincides with the rupee facing intense pressure due to elevated crude oil prices and rising U.S. Treasury yields. In response, the RBI has actively intervened using both spot and forward transactions to manage excessive volatility in the market.

This recent decline surpasses the previous week’s $15 billion drop, which had brought reserves down to $765.9 billion—the steepest weekly decline since November 15, 2024. Prior to that, reserves had reached a peak of $785.7 billion in the week ending September 5, largely supported by $133 billion inflows from Non-Resident Indians (NRIs).

The current downturn is primarily driven by a substantial $15.16 billion fall in foreign currency assets (FCAs), reducing them to $615.41 billion. FCAs constitute the largest portion of the reserves and include assets denominated in major currencies like the euro, pound, and yen.

Additionally, the value of the RBI’s gold reserves declined by $2.6 billion during the reporting week, bringing their total value to $108.70 billion, according to data released by the central bank on Friday.

Despite mobilizing over $143 billion through three concessional forex swap windows introduced since June 8, the rupee continues to face downward pressure. A major contribution of $133 billion came through FCNR-B deposits made by NRIs.

Multiple economic factors are contributing to the rupee’s instability, including climbing crude oil prices and soaring global bond yields. During the reporting week, crude oil averaged around $104 per barrel, while U.S. Treasury yields exceeded 5.25%, reaching levels not seen since 2004. Domestically, bond yields have also risen to a two-year high of approximately 7.20%.

The RBI’s proactive involvement in stabilizing the forex market is highlighted by the dramatic increase in its net forward dollar liabilities, which surged to a record $200 billion in August. This represents a $63 billion rise from the prior month, following a $137 billion level in July.

In the dollar-swap mechanism, commercial banks exchanged dollars with the RBI, thereby augmenting the nation’s foreign exchange reserves while simultaneously creating a matching forward dollar obligation for the central bank.

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