Forex Reserves Fall $14.9 Billion as RBI Defends the Rupee

India’s foreign exchange reserves dropped by $14.9 billion in the week ended 18 September, their biggest fall in almost two years, to $765.9 billion, RBI data showed on Friday. Not since the week of 15 November 2024 has the war chest shrunk this fast.

The reason is the rupee. With crude above $105 a barrel and 10-year US Treasury yields stuck above 5 per cent, the central bank has been selling dollars hard to keep the currency steady.

Just a week before, the reserves were at $780.8 billion. And on 5 September they had touched a record $785.7 billion, pushed up by money flowing into the RBI’s FCNR(B) deposit swap scheme.

Where the money went

Almost all of the drop showed up in foreign currency assets, the biggest part of the reserves, which shrank by $14.8 billion to $631 billion. Gold actually went up a little, by $68 million, to $111.3 billion. SDRs lost $106 million to $18.7 billion; India’s reserve position with the IMF was $27 million lower at $4.9 billion.

Economists put most of the decline down to direct dollar selling. Gaura Sen Gupta, chief economist at IDFC FIRST Bank, told Business Standard that “there was an actual dollar sale of $10.9 billion”, with revaluation losses explaining the rest. Swings in the dollar against other reserve currencies, and in the value of bonds in the portfolio, can move the headline number without any intervention at all.

That distinction matters. A $10.9 billion sale in one week is a large intervention by any standard, and it shows how hard the RBI is leaning against depreciation pressure in both the spot and forward markets.

The pressure points

The rupee is caught between two external shocks. The first is oil. With Brent above $100 a barrel amid the conflict involving Iran and disruption around the Strait of Hormuz, India’s import bill has swollen. As one of the world’s largest crude importers, the country needs more dollars for every barrel, and that weighs on the currency.

The second is US interest rates. The Federal Reserve raised its policy rate earlier this month, and the 10-year Treasury yield has climbed above 5 per cent. Higher returns on dollar assets tend to pull portfolio money out of emerging markets, adding to pressure on currencies such as the rupee. Business Standard reported a sell-off in the rupee and Indian bonds on 24 September as crude and US yields rose together.

At home, the picture is steadier. The RBI’s September Bulletin, released on 25 September, put first-quarter GDP growth for 2026-27 at 7.8 per cent and August headline inflation at 4.8 per cent. It also projected private corporate capital expenditure of ₹3.2 lakh crore in 2026-27. The central bank’s task is to stop external turbulence from undermining that fairly healthy mix of growth and inflation.

Why it matters for business and investors

For importers, especially oil marketing companies, airlines and electronics makers, a weaker rupee means higher input costs. The RBI’s intervention buys time and dampens volatility, which helps companies plan their hedging. Exporters in IT services, pharmaceuticals and textiles gain from a softer rupee, but they too prefer stability to sharp swings.

For bond investors, dollar sales by the central bank drain rupee liquidity from the banking system, which can push up short-term rates. That comes at a sensitive time for the government securities market, where the 10-year benchmark yield closed on Friday at 7.12 per cent.

For equity investors, the data is both reassuring and a warning. At over $765 billion, India’s reserves remain among the largest in the world and give the RBI plenty of room to deal with disorderly moves. But a drawdown of nearly $15 billion in a single week shows how quickly the cost of defending the currency rises when oil and US yields turn against India at the same time.

There is a practical question too. The recent record was built partly on FCNR(B) swap inflows, which had mobilised $143.6 billion by 18 September. These inflows bolster reserves, but they carry future obligations that the central bank must manage as the swaps mature.

What happens next

The next weekly reserves data is due on Friday, 2 October, and will show whether the intervention continued into the last full week of September. Markets will also watch the RBI’s forward book, which shows how much dollar selling has been committed for future dates.

Much depends on factors outside India’s control. A lasting easing in oil prices, perhaps linked to diplomatic progress over Hormuz, would take pressure off the rupee; a further rise in US yields would add to it. Until one of those forces turns, the RBI is likely to keep using its reserves to smooth the rupee’s path rather than defend a particular level.