India’s forex reserves fall $1.27 billion as lower gold value outweighs rise in dollar assets

India’s foreign exchange reserves declined by $1.27 billion to $719.75 billion in the week ended October 23, according to the Reserve Bank of India’s (RBI) Weekly Statistical Supplement released on October 30. The decline was primarily driven by a fall in the value of gold holdings, which more than offset an increase in foreign currency assets, RBI data showed.

Gold reserves declined by $2.65 billion to $103.15 billion during the reporting week. In contrast, foreign currency assets, the largest component of India’s forex reserves, increased by $1.36 billion to $593.21 billion.

RBI steps up measures to support rupee

The latest reserve movement comes amid continued pressure on the rupee, prompting the RBI to announce a series of measures in October to curb speculative activity and moderate dollar demand.

One such measure was a special dollar-selling window for three public sector oil marketing companies (OMCs) — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — to meet their daily foreign exchange requirements directly through the central bank.

The facility, which came into effect on October 12, allows the RBI to supply dollars to the three state-run companies through designated banks, reducing their dependence on the domestic spot foreign exchange market.

The central bank also restricted banks’ net open positions in the rupee to $100 million and tightened rules governing their foreign exchange derivative positions. It further restricted banks from rebooking cancelled rupee derivative contracts in a bid to curb speculative activity and manage volatility in the currency market.

RBI’s dollar intervention and foreign currency inflows

The RBI’s actions come against the backdrop of sustained pressure on the rupee from elevated crude oil prices and dollar demand. The central bank has also been managing foreign currency inflows and intervening in the market to contain volatility.

Earlier this year, the RBI’s efforts to attract foreign currency inflows through a special swap facility mobilised substantial resources. The measures attracted $143.5 billion in total inflows, including nearly $133 billion through foreign currency deposits, according to Reuters.

These inflows helped strengthen India’s foreign exchange position. However, experts have attributed the subsequent decline in reserves partly to the deployment of FCNR(B) resources and the RBI’s intervention in the currency market through dollar sales.

According to a Reuters report published on October 15, the RBI had deployed an estimated $75–80 billion through spot dollar sales and dollar-rupee swaps since June, based on estimates by economists and foreign exchange market participants.

Foreign investors return to buying Indian equities

Against this backdrop of currency-market pressure, foreign institutional investors (FIIs) turned net buyers of Indian equities on Friday, purchasing shares worth ₹3,598.54 crore on a provisional basis, according to exchange data.

FIIs bought shares worth ₹20,564.02 crore and sold ₹16,965.48 crore during the session. This marked a reversal from Thursday, when foreign investors were net sellers to the tune of ₹943.60 crore.

Domestic institutional investors (DIIs), meanwhile, turned net sellers on Friday, offloading equities worth ₹817.51 crore. On Thursday, DIIs had purchased shares worth ₹1,924.41 crore.

The shift in investor flows coincided with a recovery in domestic equities. The Sensex rose 308.5 points to close at 74,459.5, while the Nifty gained 116.3 points to settle at 23,053. Both benchmark indices ended near their day’s highs, extending gains for a second consecutive session, with the Nifty holding above the 23,000 mark.

Other components of forex reserves

Apart from foreign currency assets and gold, India’s Special Drawing Rights (SDRs) increased by $27 million to $18.61 billion during the week ended October 23.

The country’s reserve position with the International Monetary Fund (IMF) declined by $4 million to $4.79 billion.

Despite the weekly decline, India’s forex reserves were higher by $24.39 billion year-on-year as of October 23, according to RBI data.