India Has Spent Up to $80bn Defending Rupee as Foreign Reserves Come Under Pressure

India has deployed an estimated $75 billion to $80 billion from the foreign-currency resources mobilized earlier this year to strengthen its external buffers, as the Reserve Bank of India (RBI) intensifies efforts to stabilize the rupee against persistent pressure from elevated oil prices, rising US Treasury yields and foreign investor outflows.

The estimated intervention represents roughly half of the more than $140 billion India mobilized through special measures introduced to attract foreign-currency inflows. The drawdown highlights the cost of defending the currency and raises questions about how long the central bank can sustain its intervention if external pressures persist.

Economists and foreign-exchange traders across six banks attributed the reduction to the RBI's direct dollar sales in the spot market and dollar-rupee sell/buy swaps designed to absorb excess rupee liquidity from the banking system.

The RBI's actions have intensified as weakness in the rupee threatens to feed into domestic inflation and broader financial stability. Higher oil prices increase India's import bill, while a stronger US dollar and rising Treasury yields can encourage capital to move away from emerging markets. Foreign equity outflows add to dollar demand and complicate efforts to stabilize the exchange rate.

The estimates of $75 billion to $80 billion in intervention were produced by three economists who adjusted weekly changes in India's foreign-exchange reserves to exclude valuation effects. Their calculations broadly align with estimates from traders involved in spot and swap transactions, based on discussions with market participants and proprietary models.

India's foreign-exchange reserves declined to $734.6 billion as of October 2, approximately $51 billion below their peak in the first week of September. Although the headline reserve stock remains substantial, analysts say the amount readily available to support the currency is a more important measure of the RBI's capacity to sustain intervention.

Usable Reserves and The Cost of Defending The Rupee

The headline reserve figure does not fully capture India's immediate capacity to supply dollars to the market. The RBI's forward positions and gold holdings complicate assessing how much foreign currency is available for intervention without creating additional obligations elsewhere on its balance sheet.

At the end of September, the central bank's net forward dollar liabilities stood at approximately $200 billion. India's gold holdings were valued at $106.4 billion as of October 2.

Forward dollar liabilities represent future dollar delivery obligations arising from the central bank's currency transactions. They are not equivalent to an immediate cash outflow, but they matter when assessing the central bank's overall foreign-currency position. Gold, meanwhile, forms part of official reserves but is not the same as immediately deployable dollar liquidity.

These distinctions have sharpened attention on the pace of reserve depletion. Ambit, a brokerage, warned that a sustained decline in usable reserves could undermine confidence in the RBI's ability to resist depreciation.

"The sharp fall in usable reserves, after adjusting for forward shorts and gold, has reached noticeable levels. A continued fall could raise doubts about the RBI's ability to defend the rupee and fuel more speculation," Ambit analysts said in a note.

The concern is not simply that reserves are falling, but that expectations about the central bank's willingness or ability to defend a particular exchange-rate level could influence market behavior. If traders increasingly expect the rupee to weaken, importers may accelerate dollar purchases, while investors could become more reluctant to hold rupee-denominated assets. Such behavior can intensify demand for dollars and force the RBI to intervene more aggressively.

However, reserve depletion alone does not establish that India is approaching an external financing crisis. The country's overall reserve position, future foreign-currency inflows, oil prices, capital movements and the RBI's policy choices will all influence the sustainability of its intervention.

The immediate challenge is to prevent currency weakness from becoming self-reinforcing without exhausting resources that may also be needed to manage future external shocks.

RBI Shifts from Supplying Dollars to Curbing Demand

The central bank has recently expanded its efforts beyond direct intervention in the foreign-exchange market.

Over the weekend preceding the report, the RBI introduced measures intended to reduce demand for dollars in the open market. It established a special window through which oil companies could purchase dollars directly from the central bank, diverting some of their demand away from commercial foreign-exchange trading.

The measure targets a significant source of dollar demand. India depends heavily on imported crude oil, meaning higher global prices increase the amount of foreign currency required to pay for energy imports. Directly supplying oil companies with dollars could reduce competition for foreign currency in the broader market, although it does not eliminate the underlying cost of those imports.

The RBI also imposed cash-margin requirements on certain forward dollar purchases, increasing the upfront cost of hedging currency exposure. The higher funding requirement is intended to discourage some dollar buying and limit transactions that could add to near-term pressure on the rupee.

These measures complement spot dollar sales and currency swaps, which operate through different channels. Spot intervention directly supplies dollars in exchange for rupees, while sell/buy swaps can help manage domestic liquidity and the central bank's foreign-currency position. Restrictions that make dollar purchases more expensive, meanwhile, seek to influence demand rather than meet it directly.

Together, the measures indicate that the RBI is attempting to manage both sides of the currency market: supplying dollars where necessary while discouraging transactions that could intensify depreciation pressure.

The approach also illustrates the limits of intervention. A central bank can smooth abrupt currency movements and influence market expectations, but it cannot permanently neutralize external pressures if the underlying demand for dollars remains elevated.

The 97-Per-Dollar Level Becomes a Focal Point

Ambit said the RBI's repeated interventions over the preceding six months whenever the exchange rate approached 97 rupees per dollar suggested that the level had become an implicit tolerance threshold.

"Over the last six months, the RBI has repeatedly stepped in with major measures whenever the exchange rate approached the 97/USD mark, signaling this level as the RBI's implicit tolerance threshold," the brokerage said.

The level is an interpretation of the RBI's behavior, rather than a formally announced exchange-rate target. Nevertheless, repeated intervention near a particular rate can shape market expectations, encouraging traders to watch for central bank action as the currency approaches that level.

Such expectations can help stabilize the rupee if market participants believe the RBI has both the resources and the determination to intervene. But they can also create a test of credibility if traders begin to doubt whether the central bank can maintain its response in the face of persistent dollar demand.

The wider implications extend beyond currency trading. A weaker rupee raises the domestic cost of imported oil and other dollar-priced commodities, potentially adding to inflation and increasing costs for businesses dependent on imported inputs. Currency volatility can also complicate financial planning for companies with foreign-currency liabilities and affect returns for international investors.

India's policy challenge is therefore to contain excessive depreciation without relying indefinitely on reserve sales. Analysts say the effectiveness of the RBI's latest measures will depend partly on whether they reduce immediate dollar demand, but also on developments in global oil markets, US bond yields and foreign investment flows.

With an estimated $75 billion to $80 billion already deployed since the special inflow measures took effect on June 8, the central bank's defense of the rupee has become a substantial use of its external buffers. The remaining reserves provide an important cushion, but continued intervention at the same pace would increase the importance of replenishing foreign-currency inflows and easing the external pressures driving demand for dollars.