Decoding the fall and rise of India’s forex reserves
Bank of India (RBI) to actively manage the value of the rupee against the dollar. India imports much of the oil that it consumes. During April to September, the country imported 87.5% of the oil that it consumed.
In such a scenario, a weaker rupee makes oil imports expensive, and either the end-consumers or the primarily government-owned oil marketing companies need to pick up that bill, making it important for the RBI to ensure that the value of the rupee doesn’t fall too much and too fast against the dollar. It ensures this by selling dollars it has in its foreign currency assets hoard and buying rupees. Doing this ensures the availability of dollars so the value of the rupee against the dollar doesn’t fall quickly.
The RBI doesn’t reveal its forex operations. But news reports suggest that over the last few months as the rupee has come under pressure against the dollar, it has been actively managing the value of the rupee. As the RBI has sold dollars from its reserves, forex reserves fell.
Foreign currency assets dipped from $540.2 billion in mid-July to $515.2 billion on 20 October. The returns on US government bonds had been going up. The per-year return on a 10-year US government bond stood at 4% in end-July.
This went up rapidly in September, touching 5% in late October. Higher returns prompted foreign institutional investors (FIIs) to sell Indian stocks and move money to the US. In September and October, FIIs sold stocks worth ₹39,316 crore.
In order to move this money out of India they had to sell rupees and buy dollars. This put pressure on the rupee, forcing the RBI to act. The return on the 10-year US government bond fell in November and now stands at around 4.2%.
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