India's foreign exchange reserves have recorded their most significant weekly decline in over a year, driven by the central bank's intervention to bolster a weakening rupee. Analysts point to substantial dollar sales by the Reserve Bank of India (RBI) as the primary cause for the sharp contraction.
Steep Decline in Forex Holdings
In the week that ended on January 2, the country's total reserves plummeted by a substantial $9.9 billion, marking the largest single-week drop in 14 months. This brought the total holdings down to $552 billion. The dramatic decrease highlights the pressure faced by the Indian currency in the face of global financial shifts.
Causes Behind the Rupee's Weakness and RBI Action
The rupee depreciated by 0.4% against the US dollar during the same period. This weakness stemmed from two key factors: outflows of foreign funds from Indian markets and perceived delays in finalizing a trade agreement between India and the United States. To curb excessive volatility and support the local currency, the RBI actively sold US dollars from its reserves.
Gaura Sen Gupta, an economist at IDFC First Bank, explained the composition of the reserves fall. She stated, "The fall in reserves is mostly on account of dollar selling by the Reserve Bank of India, and to a smaller extent, the revaluation of reserves as US yields rose and the dollar strengthened." This indicates that while the RBI's direct intervention was the main driver, the overall increase in the value of the US dollar also reduced the worth of non-dollar assets held in the reserves.
Implications and Market Outlook
This substantial drawdown showcases the RBI's commitment to maintaining orderly market conditions and preventing a rapid depreciation of the rupee. While the reserve buffer remains sizable, such interventions are closely watched as indicators of currency stress. The market will now monitor upcoming data for signs of stabilization in foreign fund flows and progress on the US-India trade deal, which could ease pressure on the rupee. The central bank's strategy of utilizing its reserves acts as a crucial shield against global financial turbulence, ensuring economic stability.
