India's Foreign Exchange Reserves Decline as Central Bank Intervenes to Support Rupee Amid Global Tensions

India's Foreign Exchange Reserves Decline by $11.68 Billion

Reserve Bank of India (RBI) data released on Friday shows that India's foreign exchange reserves fell by $11.68 billion in the week of March 6, marking the largest decline since November 2024.

The decline in foreign exchange reserves is attributed to the RBI's intervention to support the Indian Rupee amid volatility caused by the Iran War. Sakshi Gupta, principal economist at HDFC Bank Ltd., notes that the RBI's actions are aimed at curbing volatility in the Indian Rupee.

The Iran War has led to a surge in oil prices, with crude prices rising nearly 37% since the start of the war. This has resulted in a rush into haven assets and a selloff across emerging markets, particularly fuel-importing nations like India. The RBI has stepped up support for the rupee and sovereign bonds through open market operation auctions and secondary market buying to infuse liquidity into the banking system.

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The decline in reserves reflects $6.1 billion of dollar sales and a roughly $5.4 billion revaluation loss on factors like strength in the US Dollar. The Bloomberg Dollar Spot Index rose by 1.3% in the March 6 week, the most since mid-November 2024. Gold prices receded more than 2%, contributing to the drawdown in reserves.

The RBI's intervention has been driven by the need to shield the rupee from the pressures caused by the Iran War. As the situation unfolds, the RBI's focus will remain on curbing volatility in the Indian Rupee.