Forex reserves fall $14.15 bn in last one month on valuation impact, RBI intervention

Country’s foreign exchange reserves have declined by $14.154 billion in almost one month due to valuation loss and the Reserve Bank of India’s (RBI) intervention in the currency spot market to curb the fall in the rupee against the dollar.

From $598.897 billion as of September 1, the foreign exchange reserves have dipped to $584.742 billion, the lowest in more than five months, on October 6, the RBI data showed.

During the period, the Foreign Currency Assets (FCA), a major component of the overall forex reserves, have fallen by $11.162 billion and the valuation of gold reserves has reduced by $2.633 billion.

“The fall in (forex) reserves is because of selling of dollars by the RBI to support the rupee and also because of the impact on valuation as the dollar has strengthened,” said Anindya Banerjee, Vice President (Currency Derivatives & Interest Rate Derivatives) at Kotak Securities Ltd.

The rupee has depreciated as the strengthening of the dollar index and hardening of US bond yields have triggered outflows from India.

“The US Fed is consistently maintaining that interest rates are likely to be higher for longer, which is driving the US bond yields higher. The dollar index is staying strong and is well above 106 levels. This is something which is strengthening the US dollar,” said Dipti Chitale, Director, Mecklai Financial Services Pvt. Ltd, a consulting company focusing on treasury risk management.

Last week, RBI Deputy Governor Michael Patra said the movements in the reserves are more or less due to valuation change rather than a durable fall.

“If you knock out the valuation changes as we do in the balance of payments (BoP), you will see there is an increase of $24 billion (in forex reserves) in a quarter,” Patra said in a press conference after the October monetary policy announcement.

Foreign exchange reserves are maintained as a multi-currency portfolio comprising major currencies such as the US dollar, Euro, Pound sterling, and Japanese yen, among others, but are valued in terms of US dollars. When the dollar strengthens, the valuation of other currencies vis-à-vis the US currency declines, leading to a notional fall in the overall forex reserves position.

The RBI also keeps the forex reserves in the dollar-denominated assets like the 10-year benchmark securities of the US and UK. Since the yield of the 10-year bonds has risen in the last few weeks, it has impacted the country’s foreign exchange reserves.

The rupee depreciated from 82.689 against the dollar on September 1 to 83.118 on October 6. The domestic currency depreciated to an all-time low of 83.22 on September 7.

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After remaining net buyer of domestic equities in the first five months of fiscal 2024, foreign portfolio investors (FPI) net sold Rs 14,768 crore of local shares in September. Overseas investors sold Rs 9784 crore of domestic shares till October 13.

Due to higher outflows, the RBI had to sell dollars to prevent the rupee from falling to a new all-time high, forex market participants said.

The RBI has always maintained that its intervention in the forex market is aimed at preventing excessive volatility, anchoring market expectations and providing a stable exchange rate regime.

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