India’s Reserves Drop as Foreigners Pull Money From Bond Market

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(Bloomberg) — India’s holdings of foreign exchange fell in late April, reflecting officials’ efforts to defend the rupee as global interest rate repricing triggered portfolio outflows.

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The stockpile fell to $637.9 billion as of April 26, data released by the Reserve Bank of India showed on Friday, down $2.4 billion compared with the week before. The reserves hit a record of about $649 billion in early April but have slipped since.

The RBI has intervened in currency markets to stem a slide in the rupee, which like the yen or the rupiah has come under pressure as traders brace for US interest rates staying higher for longer. Foreigners selling Indian bonds and repatriating funds would add to pressure on the currency.

“In April the decline in FX reserves has been led by both revaluation loss and net dollar sales by RBI to limit the volatility in the rupee,” said Gaura Sen Gupta, an economist at IDFC FIRST Bank Ltd.

Keen to shield itself from hot money flows, India holds one of the largest stockpiles of foreign exchange in the world. RBI Governor Shaktikanta Das has termed the accumulation of reserves as “an insurance against spillover risks.”

The drop in reserves comes as India gears up to join JPMorgan Chase & Co.’s global indexes from June. That’s got global investors zeroing in on the country’s currency and bond market. The securities eligible for index inclusion registered net outflows in April, according to Clearing Corporation of India Ltd. figures.

Foreign funds sold nearly $2 billion of Indian sovereign and corporate bonds in April, a pace unmatched since May 2020 and the first month of net sales since March last year.

The reserves are “India’s first line of defense and they should be used in both directions to smoothen out any unnecessary volatility,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. The RBI may also prefer to absorb inflows “to guard against any future outflow,” she said.

India has been cited by the US Treasury for its currency management practices, though it did not feature on the November 2023 currency manipulator watch list.

–With assistance from Ronojoy Mazumdar.

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