UPSC Darpan

EconomyGS33 October 2026

Forex Reserves Fall $38 Billion in Three Weeks as RBI Unwinds Its Forward Book

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The news

Mumbai/New Delhi. India’s foreign exchange reserves fell $18.343 billion in the week to September 25 to $747.557 billion, the third weekly fall in a row, RBI data released on October 2 show — $38.15 billion below the record $785.71 billion of September 4. The Indian Express links the fall to the RBI squaring off its short forward book, a record $200 billion at end-August; being “short” means the RBI has sold dollars for future delivery. The book grew as $133 billion came in through a concessional swap for FCNR(B) deposits between June 8 and August 31. The Economic Times adds rupee defence and revaluation. Separately, loans against fixed deposits jumped 43.2% to ₹2.04 lakh crore in August, which analysts attribute to NRIs borrowing up to nine times against FCNR(B) deposits to redeposit.

The chain in one line: Iran war swells the oil bill and drives out portfolio money → rupee hits ₹96.83 a dollar in May → RBI opens a concessional FCNR(B) swap and $133 billion flows in → a record $200 billion short forward book builds up → forwards now mature and reserves fall $38 billion in three weeks

Static syllabus linkage

  1. Reserves have four parts, held by the RBI. India’s foreign exchange reserves comprise foreign currency assets, gold, Special Drawing Rights (the IMF’s reserve asset) and the reserve tranche position at the IMF. The RBI manages them under the Reserve Bank of India Act, 1934, while the Foreign Exchange Management Act (FEMA), 1999, which replaced the criminal-law FERA of 1973, governs foreign exchange transactions.
  2. FCNR(B) deposits put currency risk on banks; a swap passes it to the RBI. An FCNR(B) deposit is a term deposit an NRI keeps in an Indian bank in a foreign currency and is repaid in that currency, so the depositor bears no rupee risk. In a swap, the bank sells those dollars to the RBI today and contracts to buy them back on a fixed date; the RBI’s promise of future delivery is its forward book.

Why UPSC loves this

  1. External-sector management is a standing GS3 theme. It falls under “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment”. Mains asks whether reserves are a buffer or a cost.

Prelims nuggets

  • India’s forex reserves consist of foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the IMF.
  • FEMA, 1999, replaced FERA, 1973, and made foreign exchange violations civil rather than criminal offences.
  • In an FCNR(B) deposit, principal and interest are repaid in foreign currency, so the exchange-rate risk lies with the bank, not the depositor.
  • A central bank with a “short” forward position has contracted to deliver dollars on a future date.

Analysis

  1. The fall is mostly scheduled delivery, not panic selling. Part of the record was borrowed: the RBI took in swapped dollars it must return. As forwards mature, those dollars leave and the headline drops even though nothing new has gone wrong. In forwards maturing within a month the RBI was actually net long $12 billion. The honest measure of firepower is reserves net of the forward book.
  2. Lens — Short-term relief and long-term reform: the swap buys calm now and a bill later. Because FCNR(B) deposits run three to five years, most of the short book matures after one year, pushing the RBI’s dollar obligation and its currency risk years ahead. The counter-view is that reserves exist for a war shock, and calming the rupee now is cheaper than a currency run. A prudent officer treats it as a bridge and uses the time to cut the oil bill.
  3. A public concession has become a private leveraged trade. The swap was meant to attract fresh NRI dollars. Banks then lent depositors up to nine times their deposit to place more FCNR(B) deposits, so the concession now rewards borrowed money. Such positions can unwind together, so the inflow is less stable than it looks.

Possible Mains question

The RBI’s concessional swap for FCNR(B) deposits strengthened reserves but created a large forward liability. Critically examine such interventions as a tool for managing currency volatility. (15 marks, 250 words)

Model approach

  1. Directive — Critically examine. Weigh benefits against hidden costs and reach a judgement.
  2. Introduction — a record built on swapped dollars. Reserves peaked at $785.71 billion on September 4 after $133 billion of FCNR(B) swap inflows, then fell $38 billion in three weeks.
  3. The swap steadied the rupee without spending owned reserves. It signalled firepower during war-time portfolio outflows.
  4. But headline reserves overstate usable reserves. Value addition: the $200 billion short book and the 43.2% jump in loans against deposits; draw a flow — NRI dollars → bank → RBI swap → reserves up now → delivery later → reserves down.
  5. Conclusion — a bridge, not a habit. Publish net reserves prominently, cap leverage on concessional deposits and diversify energy imports.

Administrator's brainstorm

As an RBI Executive Director, would you curb bank lending against FCNR(B) deposits now?

Yes, but only for new deposits. A sudden ban could force NRIs to unwind leveraged positions at once and hurt the rupee I am protecting. I would cap leverage on deposits that earn the concession and let existing positions run off.