India's foreign exchange reserves have seen their most significant drop in 2025, primarily due to the Reserve Bank of India (RBI) intervening to stabilize the rupee. The reserves decreased by USD 9.32 billion to USD 688.871 billion for the week ending August 1, marking one of the steepest weekly declines in recent months.
Decline in Reserves
The sharp decline in forex reserves is attributed to the RBI's actions in the foreign exchange market to manage the rupee's volatility. The central bank intervenes to ensure orderly trading conditions without targeting a specific exchange rate. This intervention often involves selling dollars to prevent a sharp depreciation of the rupee.
The decline of USD 9.32 billion includes a USD 7.32 billion reduction in foreign currency assets, which form a major part of the reserves, bringing them down to USD 581.607 billion. Gold reserves also decreased by USD 1.71 billion to USD 83.998 billion. Furthermore, Special Drawing Rights (SDRs) fell by USD 237 million to USD 18.572 billion, and India's reserve position with the International Monetary Fund (IMF) decreased by USD 59 million to USD 4.694 billion.
RBI's Actions and Rupee Defense
The RBI's intervention is likely a response to the weakening rupee, which has faced downward pressure due to several factors. Rising trade tensions with the U.S., including tariff impositions, have contributed to this pressure. For instance, the U.S. President threatened to substantially increase tariffs on Indian imports. Such actions have prompted concerns about India's GDP growth, with some projections suggesting a dip if tariffs are significantly increased.
Moreover, there have been outflows from equity markets, adding to the pressure on the rupee. To encourage greater use of the Indian Rupee for trade transactions, in July 2022, an additional arrangement in the form of Special Rupee Vostro Account (SRVA) was introduced.
Broader Economic Context
The recent fall in reserves needs to be viewed in the context of broader trends in the Indian economy. India's total forex reserves had reached a record high of USD 705 billion in September 2024. However, since then, there has been a gradual decline, reflecting the increasing extent of forex sales by the RBI to manage the currency.
The slide in the rupee also occurs amid concerns about narrowing interest rate differentials between India and the United States and sustained equity outflows. Foreign investors have been net sellers in the Indian market, contributing to the rupee's depreciation.
Impact and Future Outlook
The depletion of forex reserves and the measures taken to stabilize the rupee have several implications. A weaker rupee could benefit exporters but may increase the cost of imports. The RBI's actions also affect liquidity in the banking sector, influencing interest rates and the overall financial ecosystem.
Looking ahead, economists and analysts expect the RBI to continue monitoring the forex market closely and intervene as necessary to maintain stability. The central bank's approach will likely depend on global economic developments, trade policies, and capital flows. While the RBI has been proactive in its measures, the rupee may still face challenges, hovering around ₹81 to a US dollar during the year. The long-term projection for India's foreign exchange reserves is to trend around USD 732000 million in 2026 and USD 740000 million in 2027.
