India's Forex Reserves Fall Nearly $60 Billion as Rupee Defence Strains Markets

A $726 Billion Buffer Faces Mounting Pressure

India's foreign exchange reserves fell to $726.027 billion in the week ended October 9, 2026, down $59.679 billion from their September 4 record, as the Reserve Bank of India sold dollars to support the rupee. The decline has been accompanied by rising costs for businesses seeking protection against further currency weakness.

The RBI's weekly statistical supplement put the latest weekly fall at $8.578 billion, following a $12.952 billion decline the previous week. Reserves have dropped about 7.6% from their peak of $785.706 billion, although they remain above their levels at the end of March and a year earlier.

High crude oil prices, rising US Treasury yields and persistent foreign investment outflows have increased demand for dollars. Foreign portfolio investors withdrew a net $26.8 billion from Indian markets during the year to date, according to National Securities Depository Limited data.

The central bank's response now extends beyond selling dollars in the market. It has opened a dedicated supply window for three government oil companies and made certain currency hedges more expensive. Those measures helped the rupee recover, but banks and businesses face thinner trading activity, higher protection costs and pressure on bond prices.

For households, the stakes run through the price of imported energy and other goods. For companies, the immediate question is how much it will cost to obtain dollars today or secure them for future payments.

What Fell Inside the Reserve Stockpile?

Foreign currency assets, the largest reserve component, declined by $7.142 billion during the latest week to $597.605 billion. They accounted for about 83% of the headline weekly fall and were $50.563 billion below their September peak.

Gold reserves fell in value by $1.319 billion to $105.094 billion. Special Drawing Rights, an international reserve asset created by the International Monetary Fund, declined by $109 million to $18.548 billion. SDRs can be exchanged for usable currencies through arrangements involving IMF members.

India's reserve position with the IMF stood at $4.780 billion. Accounts of the weekly release disagree over its movement: several give a $10 million decline, while another gives a $10 million increase. The reported closing balance is the same.

Reserve values change for several reasons. Dollar sales reduce the stock, while movements in gold prices and currencies such as the euro, pound and yen also alter its dollar value. A weaker euro, for example, reduces the dollar value of euro assets even when the RBI holds the same amount of them.

The latest total was still $34.920 billion above the end of March 2026 and $28.244 billion above a year earlier. Foreign currency assets were $45.323 billion higher than at the end of March, while gold reserves were $10.301 billion lower. India has therefore lost a sizeable part of its recent reserve build, while retaining a larger stock than at those earlier comparison points.

How the Pressure Built

The reserve peak followed substantial inflows under a special concessional swap scheme for deposits from the Indian diaspora. Banks raised nearly $133 billion through that programme. Under a currency swap, parties exchange currencies and agree to reverse the exchange later under specified terms.

The sequence shows how quickly the focus shifted from attracting foreign currency to managing its outflow:

• June 8: Special measures to attract foreign currency inflows took effect.
• September 4: Reserves reached a record $785.706 billion.
• October 2: Reserves stood at $734.606 billion after a weekly decline of $12.952 billion, following a fall of about $18.34 billion the previous week.
• October 9: Reserves fell to $726.027 billion.
• October 10: The RBI announced tighter currency derivative rules and a special dollar facility for government oil companies.
• October 12: The oil company window began operating, and the rupee strengthened about 1% to 95.77 per dollar.

The October measures followed the RBI's first interest rate increase in nearly four years. The October currency restrictions also reduced the threshold for certain hedges without documentation of the underlying exposure from $100 million to $5 million and barred the rebooking of cancelled rupee currency derivative contracts.

How Much Has the RBI Deployed?

Economists at banks estimate that the RBI deployed $75 billion to $80 billion through spot dollar sales and dollar and rupee swaps from June 8. Their calculations adjust weekly reserve movements to remove changes caused by asset valuations.

The estimate covers a longer period and a broader set of transactions than the $59.679 billion fall from the September reserve peak. Spot transactions exchange currencies for immediate delivery. Swaps combine an exchange now with an agreement to reverse it later, affecting both dollar availability and the supply of rupees in the banking system.

The estimated deployment amounts to roughly half of the more than $140 billion mobilised through special measures earlier in the year. The RBI has not given an official intervention total matching that estimate.

Future commitments also matter. The RBI's net forward dollar liabilities were about $200 billion at the end of September. These are commitments involving future dollar delivery, so assessing the central bank's room to act requires looking at both current assets and later obligations. Gold, valued at $106.4 billion on October 2, is another substantial part of the reserve stock rather than immediately available dollar cash.

Oil Companies Get a Direct Dollar Channel

Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation can now obtain their daily dollar requirements through designated banks under the RBI's special window. Previously, their large purchases competed with other demand in the spot market.

Prashant Vasisht, senior vice president and co group head for corporate ratings at Icra, estimates that about $11 billion to $12 billion of monthly dollar demand could shift away from that market. Manas Majumdar, partner and leader for oil, gas, fuels and resources at PwC India, puts India's crude imports last year at around $165 billion, equivalent to roughly $13 billion to $14 billion a month.

The facility gives the three companies a more predictable way to obtain dollars. Their demand is large and recurring, and higher oil prices increase the foreign currency needed to pay suppliers. Majumdar said the Indian crude basket had averaged $114.80 a barrel during September.

Vivek Iyer, partner and financial services risk advisory leader at Grant Thornton Bharat, explained how the current facility draws on reserves:

"Because these are outright sales, every dollar comes straight out of reserves, so the window works as a bridge, not a lasting fix," Iyer said.

The 2013 oil company arrangement used swaps; the current mechanism uses outright dollar sales. Oil import payments therefore continue, with the RBI taking on more of the task of supplying the dollars. Private refiners and buyers paying for gold, defence purchases and other imports still seek foreign currency through the market.

Why Currency Protection Became More Expensive

The RBI's new rules require lenders to set aside 20% of the rupee equivalent of specified foreign exchange derivative transactions exceeding $2 million. Holding that cash carries a cost, which can feed into the price banks charge customers.

Companies use derivatives such as forwards to agree today on an exchange rate for a future payment. An importer expecting a dollar invoice can use a forward contract to make its rupee cost more predictable. This protection is called hedging.

The three month onshore dollar and rupee forward yield reached 6.54%, its highest closing level since May 2016. That quoted yield is a market measure associated with securing dollars for future delivery; the cost of an individual contract depends on its terms and duration.

Anshul Chandak, head of treasury at RBL Bank in Mumbai, described the market effects:

"Hedging costs shooting higher and illiquid markets are the unintended consequences," Chandak said.

Abhishek Goenka, chief executive of currency advisory firm IFA Global, described the forwards market as "extremely dislocated" and advised clients to hedge immediate needs. He said unusual pricing had made borrowing rupees and swapping them into dollars cheaper than borrowing dollars directly.

The RBI subsequently clarified that the restrictions apply to transactions used to hedge currency risk, rather than banks' currency purchases and sales for clients and their activity keeping markets functioning. Banks nevertheless expect subdued client currency business and possible losses on bond trading during the October to December quarter, according to Chandak.

A Stronger Rupee Meets a More Costly Market

The rupee recovered to around 95 per dollar after approaching 97 before the measures. Its weekly advance was about 1.8%, making it the region's strongest performer during that period, even after substantial weakness earlier in the year.

Government bond yields also reached their highest level in more than three years. Investors were weighing the possibility of further interest rate increases as expensive oil and foreign outflows continued. When bond yields rise, the market prices of existing bonds generally fall, creating potential trading losses for banks holding them.

Foreign investors face another calculation: the return on an Indian asset after paying to protect against currency movements. Shamaila Khan, head of global emerging markets and Asia Pacific fixed income at UBS Asset Management, said higher hedging costs would increase the returns UBS requires from Indian assets, although its strategic view and allocation had not materially changed.

Khan described the conditions investors need:

"The key is maintaining a transparent framework and efficient ability to hedge and transact," Khan said.

The pressure reaches beyond trading desks. India's upgraded growth forecast from the IMF put expansion at 7% for both 2026-27 and 2027-28, alongside projected consumer inflation of 5% in 2026-27. Higher energy bills and a weaker currency can squeeze household budgets even while domestic spending and investment support growth.

What Will Determine the Next Phase?

India's external debt stood at $778.2 billion at the end of June 2026, up $15.4 billion from the end of March. At that June reference date, reserves equalled 85.9% of external debt, down from 90.6% at the end of March, according to RBI data.

The Department of Economic Affairs' April review put reserves at 94% of external debt at the end of December 2025. It also estimated that reserves of $700.9 billion provided around 11 months of import cover. The current import cushion depends on today's import bill, including the price of oil, as well as the reserve stock.

Investors have different expectations for the currency. Guan Yi Low, head of Asia fixed income at M&G Investments, said the RBI's resolve could help keep the dollar near or below 96 rupees. Aaron Hurd, senior portfolio manager for currency at State Street Investment Management, forecast a move toward 99 to 100 over the following year from around 95.

Oil prices, foreign investment flows and the cost of currency protection will determine how much support is needed. Lower oil prices would reduce recurring dollar demand, while renewed investment inflows would replenish supply. Until then, each intervention draws on resources that also help India meet import payments and external obligations.

Key Points

• Reserves fell to $726.027 billion on October 9, down $59.679 billion, or about 7.6%, from September 4.
• Foreign currency assets accounted for about 83% of the latest weekly reserve decline.
• Bank economists estimate $75 billion to $80 billion of RBI dollar sales and swap activity since June 8.
• A special window could move $11 billion to $12 billion of monthly government oil company demand away from the spot market.
• The rupee rebounded, while currency hedging costs and bond yields rose sharply.
• Reserves remained above their end of March and year earlier levels, but continued oil demand and capital outflows are putting the buffer under pressure.