Amid rupee fall, RBI’s forex reserves post biggest weekly drop in three months

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The Reserve Bank of India’s (RBI) foreign exchange reserves logged their biggest weekly drop in three months in the week ended July 1, data released on July 8 showed.

Foreign exchange reserves stood at $588.31 billion last week, down $5 billion from their level on June 24. The last time the RBI’s reserves dropped by a larger margin was in the week ended April 1, when they fell by a massive $11.17 billion, RBI data showed.

The decline in the reserves was driven by a $4.47 billion drop in the RBI’s foreign currency assets, which fell to $524.75 billion. Gold reserves fell by $504 million to $40.42 billion. However, this drop is likely due to a revaluation of the RBI’s gold holdings, which is performed at the end of every month.

The fall in the RBI’s foreign exchange reserves comes amid a sharp depreciation of the rupee’s exchange rate. With the RBI’s stated stance being the prevention of volatility in the exchange rate, it intervenes in the forex market to control sharp movements.

The rupee has been on weakening for some time, with heightened global recession risks, high-risk aversion, and large policy spill-overs following Russia’s invasion of Ukraine in late February resulting in the Indian unit hitting a record low of 79.36 per dollar on July 5. So far in FY23, the rupee has fallen by over 4 percent against the greenback.

Pressure on the rupee has eased somewhat after the RBI announced a series of measures on July 6 to boost forex inflows. These included greater freedom for banks to raise foreign currency deposits from non-residents and lifting a cap on foreign portfolio investors’ short-term investments in government and corporate debt. Experts, however, doubt the measures will boost foreign inflows significantly.

While the RBI acknowledged on July 6 the global outlook is clouded by recession risks, it said its foreign exchange reserves were “adequate” to prevent exchange rate volatility.