India's Forex Reserves Fall $18.3 Billion in Record Weekly Drop

Synopsis

The foreign exchange reserves dropped $18.34 billion to $747.56 billion in the week that ended Sept. 25, the biggest weekly drop on record, according to data from Bloomberg. The RBI is intervening in the currency market amid crude prices above $100 a barrel and rising yields in the US. The Governor has previously said that reserves are satisfactory based on normal criteria. The monetary policy committee is set to meet from October 5 onwards.

The Reserve Bank of India (RBI) on Friday reported that India's foreign exchange reserves fell $18.343 billion to $747.557 billion in the week ended 25 September. It's the largest weekly drop in the history of the Bloomberg data, which compiled the data. Reserves have now declined three weeks in a row.

Anatomy of the decline

The value of foreign currency assets fell by $15.57 billion to $615.411 billion. Gold reserves fell $2.591 billion to $108.701 billion. The stock of SDRs dropped $97 million to $18.642 billion, while the reserve position with the IMF dropped $86 million to $4.804 billion.

The change in value of foreign currency assets, which means the euro, pound and yen, etc., as opposed to the U.S. dollar. Any weekly move can, therefore, be as much a reflection of valuation as anything else as part of a weekly move.

Reserves have been shedding about $38 billion in three weeks after a record $785.7 billion loss in the week ended 4 September. They have been above the peak of $728.49 billion, which they hit on 27th February prior to the onset of the conflict in West Asia.

Foreign Currency Non-Resident (Bank) deposits are foreign currency term deposits by non-resident Indians. Banks can enter into a zero cost hedging arrangement with the RBI to swap these deposits.

Why the RBI is in the market

The rupee was 0.5 per cent weaker against the dollar on Thursday to trade at 96.31. Brent crude ticked past $100 a barrel, while the yield on US 10-year Treasuries surged to 5.34 per cent, the highest since 2002.

The RBI is intervening through its spot and forward transactions to dampen out the excessive volatility. The rupee had recently hit a new low of 96.96 earlier in May when it was intervened.

The slide was a sudden bounce-back. Reserves dropped to $666.9 billion in the week ended 26 June as the result of dollar sales in the wake of the West Asia crisis. The FCNR(B) swap window then garnered $143.6 billion of inflows till 18th September.

The adequacy question

Mr Malhotra had on 5 August mentioned that the import cover was more than 10 months and it covered almost 90.8 per cent of external debt. The exchange rate will be market determined, he added, adding that the RBI will not allow excessive volatility and disorderliness. Those ratios are from before September and the fall.

What to watch

The Monetary Policy Committee will hold its meeting between 5 and 7 October, during which they will focus on whether they will increase the repo rate, Business Standard reports. The magnitude of the support the RBI will need to give will now be determined by the route taken by both the Brent and the US prices.

A reserves stock that is still higher than its pre-conflict level provides the central bank with room. The weekly rate of drop will determine the duration of that room.