The delivery of US dollars from the Reserve Bank of India’s (RBI) forward contracts and appreciation of other foreign currency assets against the greenback may have led to the significant jump of $6.6 billion in India’s foreign exchange reserves, according to experts. Forex reserves saw the sharpest weekly rise since September 2021 to $531.1 billion for the week ended October 28, according to the Reserve Bank of India (RBI) data.
These factors, coupled with higher export receipts, may have resulted in higher forex chest during the festival week, Madan Sabnavis, chief economist at Bank of Baroda, said. The magnitude of the foreign fund inflow during the week was not so high as to impact the reserves, he said. FPI inflows in the week under review stood at $550 million, according to data with the depositories.
The appreciation of other currencies in the RBI reserves against the US dollars might have aided the increase, Ashutosh Khajuria, executive director of Federal Bank, said. Other than the US dollar, the central bank holds pound sterling, yen and euro in its forex reserves. These currencies are expressed in US dollar terms, and any appreciation in these currencies will result in higher reserves.
The appreciation of the rupee against the US dollar might have led to an impression among the market participants that the RBI is buying the greenback, which actually might not be the case, Khajuria said. “Movements in the FCA occur mainly on account of purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the central government and changes on account of revaluation of the assets,” the RBI said in its half yearly report on management of foreign exchange reserves.
Despite the weekly increase, the reserves have been falling for months as the central bank is intervening in the currency market to prevent volatility in the market. So far, the country’s foreign exchange reserves have fallen by $111 billion on a year-on-year basis. However, a good part of the decline in the reserves is due to depreciation of other foreign currencies held by the RBI as the US dollar gained strength due to the US Federal Reserve raising interest rates. Earlier, RBI governor Shaktikanta Das had said around 67% of the decline in the reserves was due to revaluation of other currencies against the dollar.
Forex reserves had fallen to their lowest levels since July 2020 to $528 billion for the week ended October 14 from an all-time high of $645 billion in October 2021. On a balance of payments basis, foreign exchange reserves increased by $4.6 billion during April-June 2022, as compared with an increase of $31.9 billion during April-June 2021, the central bank said in the report.