India's foreign exchange reserves fell $1.37 billion to $117.52 billion in the week to August 27 as the central bank intervened to support a shaky rupee on the back of thinning foreign capital inflows and a rising dollar.
Data from the central bank on Saturday showed foreign exchange reserves fell for the third straight week and analysts say it could drop further as the Reserve Bank of India digs deeper to bolster the rupee and cushion the economy from the high prices of crude oil, India's biggest import.
The reserves include India's Reserve Tranche Position in the International Monetary Fund, the central bank said. "The drop is mainly because of the dollar's gains against the major currencies that week," said Sanjeet Singh, an economist at ICICI Securities, Bombay.
"The central bank may have also stepped in to protect the rupee from sliding." The central bank said foreign currency assets expressed in US dollar terms included the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen.
While the dollar gained 2.5 percent against the euro to a three-week high in the week to August 27 it also rose about 1.5 percent against sterling, bolstered by robust US economic data.
However despite the fall, foreign exchange reserves are enough to finance nearly 17 months of imports and traders say the central bank is likely to use this buffer to keep propping up the rupee and dampen inflationary pressures in the economy.
India's annual inflation rose to a 3-1/2-year high of 8.17 percent in the year to August 21 due to higher food and energy prices from 7.94 percent in the previous week.