After falling for two straight weeks, India’s foreign exchange reserves rose by $2.35 billion in the week ended September 11 to $351.38 billion, data from the Reserve Bank of India showed.
The rise indicates that the RBI could be buying dollars from the market given that the rupee had largely stabilised last week after a sharp fall in the previous weeks following sell-off in global equity markets. Although an increase, reserves are still down from the all-time high of $355.45 billion on June 19.
The RBI’s dollar purchases from the spot market too have reduced off late as its bulletin showed that the central bank bought only $149 million in July, far lower than previous months.
Ever since large outflows from the local bond market dragged the rupee to an all-time low of 68.85/$ in August 2013 and drove up bond yields by 100 basis points, the central bank has been cautiously building reserves. Dollar inflows into bonds are considered as “hot money” or short-term flows that tend to be fickle and could quickly reverse. Data shows that dollar purchases by the RBI still persist but it has been buying more in the forward market.
The September bulletin of the central bank shows that the RBI has piled up an outstanding $4.6 billion worth of forward dollar/rupee contracts as of July, which is an increase of $2.7 billion over two months.
In contrast, the RBI bought about $169 million in July, far lower than the previous two months.
Reserves had fallen by a big $6.29 billion between August 28 and September 4, largely due to dollar outflows from Indian equities on the back of global market turmoil during that time. In August, the rupee had weakened by 3.5% to fall past the key 66/$ level and hit a fresh two-year low. The currency has recovered and ended at 65.67/$ on Friday.