The rupee has fallen more than 7% this year, the weakest performance in Asia. Elevated crude and rising global yields are doing the heavy lifting, while foreign investors have pulled nearly $30 billion from local equities. As a large oil importer, India is exposed to Middle East tensions that can keep energy costs high, adding to the pressure.
Dealers say the RBI has been leaning against the slide by selling dollars in the spot market and running sell/buy swaps in forwards to soak up excess liquidity. That lines up with the numbers: the period ending Oct. 2 saw a $51 billion reduction, which left reserves at $734 billion on Friday compared with the $785 billion peak in the week to Sept. 4.
A special window to attract dollar deposits pulled in $133 billion. The subsequent drop suggests over one-third of those funds has already been eroded, with part of the decline also reflecting a stronger dollar.
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Traders note the RBI's forward book is a $200 billion negative position, reflecting repayment obligations and implying effective reserves are below the headline figure. On Wednesday, Governor Sanjay Malhotra sought to reassure investors, noting that reserves are sufficient, providing roughly eleven months of import cover, while external debt stands at 94.4%. He also argued the rupee may be undervalued and cautioned that markets can act irrationally in the short run.
On Wednesday the RBI shifted its stance to calibrated tightening, flagging the prospect of further hikes as price pressures build. A separate first rate increase in nearly four years has done little to stop the currency's slide. On Thursday the rupee was little changed after briefly firming as much as 0.1% to 96.68 per dollar, with traders citing RBI support.
Speaking for Mecklai Financial Services Pvt. as its deputy chief executive officer, Ritesh Bhansali said, "The sharp decline in the RBI's reserves is a cause of concern and it is something that the market is closely watching," adding, "At present, the central bank's intervention is the only factor that is keeping the rupee where it is."
In Mumbai, DBS Bank Ltd.'s head of treasury, Ashhish Vaidya, said, "The central bank has been put into a very difficult spot and to my mind the only way out of this spiral is to hike rates sufficiently like about a 100 basis points in one go."
HDFC Bank Ltd. projects the pair will fluctuate between 96 and 98 during the latter half of the fiscal year ending March, while Mecklai says a break of 97 could open 98.50. "Interest-rate hikes offer a weak defence in the short term for the currency and the weakness in being driven by broader factors including oil prices, equity valuations and FII outflows, AI trade and US dollar strength," wrote HDFC Bank principal economist Sakshi Gupta, who expects the RBI to "actively intervene in the FX market to limit the pace of depreciation in the rupee."
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