Foreign exchange reserves are being gradually depleted; Indian overseas diaspora are 'sending money to save the country'.

Qiu Lin To stabilize the continuously falling rupee exchange rate, the Reserve Bank of India (RBI) has recently been aggressively selling U.S. dollars in the market. How fast is its foreign exchange reserve being depleted? In just over one month—from September to now—India’s foreign exchange reserves have already evaporated by $50 billion, leaving only $734.6 billion on the books. According to Wall Street Insights’ report dated October 17, the RBI is paying an increasingly heavy price to defend the rupee. Since early September, India’s foreign exchange reserves have shrunk by $50 billion. Compounding this pressure is a massive $200 billion negative dollar forward position, coupled with an additional $35 billion in forward dollar exposure across the banking system—pushing this currency defense campaign toward a sustainability tipping point. Many people may not grasp what it truly means for a country to exhaust its foreign exchange reserves. Put simply, the U.S. dollar is the world’s hard currency—the universal medium for purchasing global goods and commodities. Once the central bank’s reserves run dry, India would lack the dollars needed even to buy oil, fertilizers, or industrial raw materials. Gas stations could run out of fuel; factories might halt production. The rupee would instantly depreciate, triggering runaway inflation. With international oil prices hovering near $100 per barrel, India’s three state-owned refiners collectively spend $120 billion annually in foreign exchange reserves to import crude oil. To prevent these refiners from competing for dollars in the open market—and thereby crashing the exchange rate—the RBI began, as of October 12, using its own foreign exchange reserves to purchase oil for them on international markets. In effect, every barrel of imported oil directly drains the RBI’s foreign exchange reserves. A recent Goldman Sachs report noted: “The underlying real demand for dollars hasn’t changed—it has merely shifted to being satisfied by the Reserve Bank of India’s foreign exchange reserves.” While this intervention eases immediate pressure on the rupee in the spot market, it accelerates reserve depletion: so long as oil prices remain near $100 per barrel, every barrel of imported oil will directly consume foreign exchange reserves. Another major drain on India’s reserves is foreign capital flight. This year, the rupee has repeatedly hit new lows against the U.S. dollar; in early October, it plunged to a record closing low of 96.88—approaching the psychological 97 threshold. Currently, the yield spread between Indian and U.S. 10-year government bonds stands at just 200 basis points, making India unattractive to foreign investors seeking returns. Amid rising global risk-aversion sentiment—and lacking hot investment themes such as AI—foreign investors have net sold $31 billion worth of Indian equities this year. Faced with rapidly dwindling treasury reserves, Indian authorities have resorted to their ultimate contingency measure: appealing to the overseas Indian diaspora to “send money to save the country.”

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Since Russia’s annexation of Crimea in 2014, Western countries have imposed economic and financial sanctions on Russia. Between 2014 and February 22, 2022, the total number of sanctions levied against Russia reached 6,517. Following the outbreak of the Russia-Ukraine conflict, the United States executed meticulously prepared financial sanctions against Russia. On February 28, the U.S. government announced the expulsion of selected Russian financial institutions from SWIFT and the freezing of the Central Bank of Russia’s foreign exchange reserves. With its reserves frozen, the central bank lost its ability to intervene in the foreign exchange market, rendering the ruble’s depreciation uncontrollable. Such a precipitous collapse in the exchange rate inevitably triggered severe inflation and widespread bankruptcy among enterprises holding foreign-currency-denominated debt. Indeed, Russia’s inflation rate had already exceeded 4% before the conflict began—making exchange-rate stabilization imperative. There are only three viable paths to stabilizing the exchange rate: central bank intervention, interest-rate hikes, and capital controls. The Central Bank of Russia opted for the second path, raising its benchmark interest rate sharply—from 9.4% before the conflict to 20%. Yet higher interest rates inevitably suppress consumption, investment, and economic growth. Thus, within an extremely short timeframe, U.S. financial sanctions threw Russia’s entire financial system into severe disarray. Washington hoped this financial chaos would quickly drag Russia’s real economy into a stagflationary quagmire. Naturally, Russia immediately implemented countermeasures. Beyond hiking interest rates and suspending stock-market trading, the Russian government halted interest and dividend payments on Russian government bonds and equities held by foreign investors; blocked foreign investors from selling Russian stocks and bonds; threatened to shut down natural-gas pipelines; mandated that exporters convert 80% of their foreign-exchange earnings into rubles; restricted non-residents from withdrawing capital and carrying foreign-currency cash abroad; and announced a ‘capital amnesty’ program to encourage residents to repatriate funds held overseas. From the perspective of the global financial system, the freezing of the Central Bank of Russia’s foreign exchange reserves by the United States and its allies represents the most significant landmark event in the international financial architecture since the Nixon Shock. The international monetary system rests upon national credit—but U.S. actions have fundamentally undermined this foundational pillar of national credibility. If central bank reserves can be frozen (and today they are frozen—what comes next? Consider the U.S. government’s decision to seize Afghanistan’s central bank reserves to compensate families of 9/11 victims), then what contract, what agreement in international finance remains inviolable? Raghuram Rajan, former Governor of the Reserve Bank of India, wrote in a Project Syndicate column that, following the freezing of Russia’s central bank reserves, China, India, and many other countries have grown anxious about the safety of their own foreign exchange holdings—if certain nations decide to freeze those assets, such reserves could become effectively unusable. Given the scarcity of highly liquid reserve currencies like the euro and the U.S. dollar, governments may need to restrict cross-border corporate lending and similar activities. Some countries may begin exploring joint development of alternative messaging systems to replace SWIFT—a trend that could fragment the global payment system. Shaktikanta Das, the current RBI Governor, stated that India’s foreign exchange reserves are sufficiently diversified. India itself faces no imminent risk of sanctions—but looking ahead, this is now a question every nation must begin contemplating. U.S. financial sanctions against Russia—particularly the freezing of the Central Bank of Russia’s foreign exchange reserves by the United States and its allies—have produced two major consequences.

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