Forex reserves rose by $33.5 billion y-o-y on account of healthy dollar inflows into local bond and equity markets through foreign portfolio investors and also strategic dollar purchases by the RBI from the forex market intermittently.
RBI bought dollars at regular levels to curb volatility in the rupee amid strong dollar inflows. Foreign investors have poured in $21.33 billion since January into Indian bonds and another $13.2 billion into equity. However, the rupee has strengthened just 0.6%, indicating the RBI prefers to thwart not just a sharp fall but also a strong appreciation of the currency.
RBI has bought $10.6 billion from the domestic foreign exchange market in July through both spot and forward transactions. In August, RBI sold a small $511 million in the spot market.
Recently, the RBI governor had said that most emerging markets will buy dollars and build reserves to insure against a possible outflow as the US Fed readies to tighten its policy.
Forex reserves fell in 2013 after foreign investors pulled out $12 billion from the market in May-December. The outflow dragged the rupee to a lifetime low of 68.25 in August 2013. RBI announced a slew of measures to attract inflows and stem the rupee's fall. Reserves have been rising since then.