India's foreign exchange reserves slumped by over $2 billion in the week ending August 12, as the Reserve Bank of India intervened to shore up the rupee and keep the currency below 80 per dollar.
That is an effort the Indian central bank has said was essential, and it would do whatever it takes to maintain the rupee's stability, limiting any wild swings despite extremely volatile currency markets.
The RBI's weekly statistical supplement data showed that the country's forex reserves slumped to $570.74 billion in the week ending August 12, down by $2.238 billion from $572.978 billion in the previous week.
The magnitude of that fall in the latest week was the largest in a month, and the country's import cover dipped for the second week.
Since Russia invaded Ukraine, India's forex reserves have fallen for 19 weeks out of a total of 25 since then, having nearly $61 billion during that period.
Still, India's forex reserves are the fourth largest globally, said RBI governor Shaktikanta Das after the latest rate-setting meeting when the central bank hiked rates for the third consecutive time.
The rupee has tumbled to just under 80 per dollar from about 74 it was trading before the Ukraine crisis, in line with a broader capital exodus into dollar-denominated assets.
The world's reserve currency, the dollar, has reigned supreme across the board, gaining significantly against almost all major currencies.
While the rupee briefly hit its all-time weak level of 80 against the dollar, the RBI has helped keep the Indian currency below that level by selling dollars in the spot and futures markets.
But the drawdown of forex reserves during periods of currency market volatilities has reduced over time due to RBI's interventions, a paper by central bank executives has said.
Expectations of volatility have also reduced during the time period of the study, which starts from 2007 and includes the current episode of volatilities triggered by the Russia-Ukraine war.
The RBI has a stated policy of intervening in the forex markets if it sees volatilities, but the central bank never lets out a targeted level. In the current episode, it has successfully defended the rupee depreciating above the 80-per-dollar-mark.
The study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S from the RBI's financial markets operations department, which does not represent the central bank's views, said the reserves depleted by 22 per cent during the 2008-09 global financial crisis as compared to only 6 per cent in the current episode following Russian invasion on Ukraine.
On an absolute basis, the 2008-09 global financial crisis led to a drawdown of $70 billion in the reserves, which came down to $17 billion during the COVID-19 period and stood at $56 billion as of July 29 this year due to the Ukraine invasion-related impact.
What has probably limited the damage to the rupee and the country's import cover is the return of foreign investors to Indian capital markets since last month.
Indeed, after being net sellers of Indian assets for several months, foreign investors turned net buyers of domestic stocks and bonds in July, with that trend still in play this month.
The fall in international crude oil prices to below $100 a barrel has also boosted investors' sentiment. Oil prices fell 1.5 per cent for the week on a stronger US dollar and fears that an economic slowdown would weaken crude demand.
Strength in the US dollar hit a five-week high, which also capped crude gains as it makes oil more expensive for buyers in other currencies.
That fall in crude prices is good news for India, which imports more than 80 per cent of its oil needs and has a widening trade deficit.