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Home / Politics / Policy /  Sharp decline in forex reserves

Mumbai: India’s foreign exchange reserves have fallen by a cumulative $3.16 billion since the beginning of 2016 to $347.21 billion as of 15 January, a sign of increased intervention by the Reserve Bank of India (RBI) in the currency markets as the rupee’s fall accelerated amid global turmoil.

Data from RBI showed that reserves dipped by $1.73 billion in the week ended 15 January. They had fallen $1.43 billion in the week ended 8 January.

The country’s reserves comprise of foreign currency assets, gold and special drawing rights (SDR) that RBI holds with the International Monetary Fund.

While changes in reserves reflect the central bank’s interventions in the foreign exchange market, they are only a loose indicator. The RBI lists details of its interventions through a separate publication with a two-month lag.

As falling oil prices and worries over China’s economy have sapped demand for riskier emerging market assets, the Indian rupee has weakened by 2.18% so far in 2016. The central bank was seen selling dollars through public sector banks on days when there was sharp depreciation in the currency, largely to limit volatility, according to foreign exchange traders.

On Friday, the currency posted a smart recovery by gaining 0.6% to 67.63 per dollar after falling to below 68/$ on Thursday.

While Friday’s gains in the rupee were driven mainly by the recovery in global equity markets and peer emerging market currencies, the Indian unit continues to be vulnerable. Currency market participants are not ruling out further intervention by the RBI, although the intensity could reduce.

“Potential RBI FX (forex) intervention falls to $7.5 billion in the March quarter from $12 billion earlier as stalling FPI inflows will now cause the FY16 BoP surplus to shrink to $21.1 billion from $25.6 billion earlier," said Bank of America Merrill Lynch in a note dated 21 January.

Notwithstanding the dollar sales by the central bank, reserves continue to be robust and Kotak Mahindra Bank estimates that they offer an import cover of 11 months, higher than most peer emerging market countries.

India’s forex reserves got the first boost after RBI governor Raghuram Rajan mopped up dollars through an innovative discounted swap arrangement with banks.

Since Rajan took charge as RBI chief on 4 September 2013, reserves have jumped $72 billion. Besides the initial boost from the swap arrangement, the central bank has been adding to the reserves by mopping up dollars from the foreign exchange market when foreign portfolio inflows were strong. It bought a massive $54.83 billion in fiscal 2015 but the mop-up has since reduced with the rupee coming under pressure. In fiscal 2016 so far, the RBI has bought about $10 billion from the spot market.

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