A $38 Billion Fall That Isn't a Crisis: Reading India's Forex Reserves Net of What the RBI Already Owes

The Number Was Never $785 Billion of Free Firepower

The headline number: India's reserves fell $38.15 billion in three weeks, from a record $785.71 billion to $747.56 billion. Headlines will call it a slump. But to understand it, you have to ask a different question: how much of that record was money the RBI had already promised to give back?

How the

reserves got so big Between June 8 and August 31, the RBI ran a concessional swap window for FCNR(B) deposits. These are foreign currency deposits that NRIs keep with Indian banks. The window drew in $133 billion, with about $10 billion more coming through a similar window for overseas corporate borrowings. Here is how a swap like this works, step by step:

1. An NRI deposits dollars with an Indian bank.
2. The bank swaps those dollars with the RBI for rupees. The dollars go into India's reserves.
3. At the same time, the RBI agrees to sell the dollars back to the bank at a fixed rate on a future date, when the deposit matures. Because the RBI offers that future rate on favourable terms, the deposit becomes attractive to NRIs. That is the "concessional" part. Step 3 is the key. Every dollar that came in through the swap came with a return ticket. On the RBI's books, that promise shows up as a short forward position: dollars sold for future delivery. By the end of August, the short forward book hit a record $200 billion.

Reading reserves net of what is owed Put the two numbers side by side as a rough illustration.

With reserves near $785 billion and about $200 billion already committed for future delivery, the portion truly free for use was closer to $585 billion. The dates do not match exactly, but the point holds: the record overstated the RBI's real room to act.

When the RBI squares off some of those forward positions, dollars leave the reserves and the headline number falls. Nothing has been lost that was not already spoken for. The gross number simply moves closer to the net one.

Why this looks like housekeeping, not stress - The near-term picture is calm. In forwards maturing within a month, the RBI was actually net long by $12 billion at end-August.

It was due to receive dollars soon, not deliver them.

• The big commitments are far off. FCNR(B) deposits run three to five years and most of the short book matures after more than a year.
• The trend is still up. Even after the fall, reserves are 7 percent higher than a year ago.

Who should care and why For an NRI depositor, the swap meant a well-protected dollar deposit in India.

For Indian banks, it meant a cheap way to raise and hedge foreign currency. For the RBI, it meant a bigger cushion today in exchange for dollar commitments years from now. Those commitments are the part a headline cannot show.

The insight for the exam Most answers will treat reserves as one number to compare against last week.

The sharper approach is to read reserves net of forward liabilities and by maturity. A fall that brings gross reserves closer to net reserves is honest accounting. A fall that cuts into the net figure would be the real warning sign.