Foreign exchange reserves rise at fastest pace in more than a year

Revaluation amid weaker dollar, spot market purchases lift reserves to $544.72 billion

With a $14.7-billion jump, the Reserve Bank of India (RBI) registered the highest weekly increase in its foreign exchange reserves since August 27, 2021. The forex reserves stood at $544.72 billion in the week ended November 11.

The sharp rise in reserves was primarily on account of an increase of $11.8 billion in the central bank’s foreign currency assets to $482.53 billion, the latest RBI data showed.

In the week gone by, the rupee strengthened sharply against the dollar, appreciating 2 per cent, as a sharper-than-expected decline in US inflation buoyed hopes of the Fed slowing down the pace of rate hikes.

The key reasons cited by analysts for the large increase in the RBI’s reserves were revaluation in the face of a weaker US dollar and possible purchases of dollars in the spot market by the central bank amid overseas investment flows.

“There is an impact of revaluation. On the DXY front, last week the dollar index fell 4 per cent. Moreover, non-dollar currency revaluations could have played a role. The euro and the pound have gained somewhere around 4 per cent. The yen also contributed 5 per cent,” HDFC Securities research analyst Dilip Parmar told Business Standard.

“Apart from that, with the RBI having continuously sold dollars for a long time, it might have come into the OTC market and bought some extra dollars which came in due to IPOs last week. Inflows were there,” he said.

Separate data released by the RBI on Friday showed that the central bank net sold $10.36 billion dollars in the spot market in September versus sales of $4.25 billion a month ago.

The month of September was a volatile one for the rupee as unexpectedly aggressive guidance on policy tightening by the US Fed resulted in huge gains for the dollar. The rupee depreciated 2.3 per cent versus the dollar in September, weakening past successive technically crucial levels.

The RBI data also showed that the central bank’s outstanding net forward purchases had reduced by $9.7 billion to $10.42 billion. The net forward purchases were at $65.79 billion at the end of the previous financial year.

“The RBI does forwards because first, the impact of intervention will be felt less in the spot market and second, because there is a liquidity impact. It does forwards to balance that out,” said Bhaskar Panda, HDFC Bank’s executive vice-president of overseas treasury.

In April, the RBI had net bought $1.9 billion in the spot market, followed by a purchase of $2 billion in May. In June, the central bank net sold $3.7 billion followed by sales of $19.05 billion in July. The RBI’s dollar sales, which are aimed at preventing excessive volatility in the rupee, result in liquidity being drained out from the banking system.

The RBI’s reserves were at $631.53 billion as on February 25, around the time that Russia invaded Ukraine.