Weekly RBI Tracker: Forex reserves fall USD 6 bn in two weeks

22 Jul 2025 , 09:24 AM

Forex reserves drop for the 2^nd consecutive week

In 2 weeks, India’s forex reserves have dropped by more than USD 6 bn. This is among the sharpest falls witnessed in recent times. Most of the fall has been due to a drop in Foreign Currency Assets while Gold reserves have been relatively stable.

The week ending 12^th July also witnessed banks sharply reducing their SDF utilization. From a 3 year peak of more than INR 3 trn, they have fallen to less than INR 1.5 trn. This has taken the 20D average SDF balances to less than INR 2.5 trn.

The upcoming data release (end of week) will contain the latest credit growth trends. After a lacklustre credit growth in the past release, this will be keenly watched to analyse the impact of RBI’s jumbo rate cut.

Forex Reserves fell by ~USD 3.1 bn:

2 weeks after crossing USD 700 bn, India’s forex reserves are sharply lower. In the week ended, 11 July, India’s forex reserves were USD 696.7 bn. Week over week, this is a fall of USD 3.1 bn. This takes the total decline in reserves over the past two weeks to USD 6.1 bn. The latest decrease was due to a continued decrease in foreign currency assets. The total value of foreign currency assets decreased by USD 2.3 bn to USD 588.8 bn. Gold reserves also fell modestly during the week to USD 84.3 bn. Gold reserves had increased substantially YTD. In 2025, while gold accounted for only 12% of total reserves, it contributed to 25% of incremental reserves.

Figure: Forex reserves fell for second consecutive week

Source: RBI

SDF falls – Is credit growth picking up?

Indian banks have shown a significant preference to park money in SDF. The preference has been strong enough to result in a continuous increase in SDF balances since April. Prior to the latest data, SDF balances (20D rolling average) were the highest in 3 years. However, the latest data shows signs of moderation. After spiking to more than INR 2.5 trn, they have moderated sharply. From a daily peak of more than INR 3 trn in early July, they have fallen to less than INR 1.5trn. It is yet to be seen if this is due to an improvement in credit growth.

Figure: SDF utilization has moderated, after touching 3 year highs

Source: RBI

What is SDF – A Primer

The SDF is a non-collateralised instrument which the banks can use for parking their surplus funds at the RBI and earn interest at a slightly lower rate than the repo. It was implemented in April 2022 as a cleaner and more efficient alternative to the conventional reverse repo.

Unlike reverse repo, the SDF does not mandate the RBI to transfer government securities as collateral, making it a more efficient tool to absorb liquidity. This has now become the de-facto floor of the RBI’s LAF corridor.

Credit Growth Moderated After A Brief Improvement:

Credit growth data is released fortnightly by the RBI. As per the earlier release, India’s banking credit growth has fallen to a tad below 9.5%. It was a disappointing development as there were expectations of RBI’s jumbo rate cut (50bps) to have a sustained impact. While credit growth improved in the first data release (since the jumbo rate cut), it moderated in the subsequent release.

Credit growth trends show that the credit growth had fallen sharply from above 10% to below 8%. This was the worst credit growth witnessed in three years. Also, there was no reversal of credit growth trends when RBI had initially cut repo rate by 50bps in 2025. Anaemic demand for credit, coupled with lack of speedy transmission of rate cuts was the likely culprit.

In the first week of June, in a surprising move, the RBI had cut the repo rate by more than 50bps. The first data release after the cut had shown a sharp improvement in credit growth trends. In a positive development, it had improved to 9.5%+ after the announcement of RBI’s jumbo rate cut. However, it has moderated again now.

A quick recap of India’s credit growth is that the conditions were excessively “hot” last year. During 2024, banking credit had jumped 20% on a year-on-year basis, supported by strong demand from corporates, retail borrowers as well as from services sector. The high pace was unsustainable and carried risks of asset quality deterioration and overheating in pockets of the economy.

A slowdown in both retail and corporate credit resulted in the current slowdown. A variety of factors including tighter norms for NBFC credit and unsecured retail credit (credit cards, personal loans etc) are being attributed to. While a moderation was expected, the sharp fall is increasingly a cause for worry.

Figure: Credit Growth moderated after showing initial signs of recovery

Source: RBI

Credit Deposit Ratio – No strong improvement:

As per the latest data release, credit deposit ratio has moderated again to ~77.5%. While it had picked up in the previous fortnight, credit to deposit ratio has moderated again. Moderating credit growth is the likely reason for the dip.

Not too long ago, credit deposit ratio was a closely watched metric as banks competed to raise deposits to meet the strong credit growth. However, the narrative on liquidity in banking has changed significantly. As credit growth slowed, banks are no longer worried about tight liquidity conditions.

Figure: Credit Deposit Ratio Drops

Source: RBI

RBI’s repo rate history:

After having maintained the benchmark policy interest rate (repo rate) for more than a year, Reserve Bank of India (RBI) had cut the benchmark rates by 100bps in 2025. The last cut of 50bps had come as a positive surprise vs expectation of 25bps. The cut was also significant as it took the repo rate to levels not seen since 2022.

While the rate cuts had been surprising, there was also a notable change in stance in RBI’s monetary policy. It changed from ‘Accommodative’ to ‘Neutral’. In essence, this implied that further rate cuts were unlikely unless the growth surprises negatively.

The latest banking credit growth data also showed that the RBI’s monetary easing may already be impacting credit growth positively. Banking credit improved to 9.5%+ after falling in the prior month to the lowest growth in more than 3 years.

Figure: 100bps Repo Rate in 2025

Source: RBI

What is Repo Rate – A Primer

The repo rate is the rate at which the RBI lends to commercial banks. A lower rate of interest reduces the cost of borrowing for banks and can ultimately mean lower interest rates for loans to consumers and businesses. It is the primary device employed by the RBI to manage the economic activity in the country.

Goals behind a cut in the Repo Rate

Encouraging Credit Demand: By making borrowing cheaper, it encourages households, firms to borrow and spend on consumption and investment goods. That can be particularly good for rate sensitive areas like housing, auto and small business.

Boosting The Economy: Economists say Reserve Bank of India’s cut will help lift economic activity by bringing down the cost of spending and investment.

Inflation Management: The RBI’s move to reduce the repo rate comes against the backdrop of inflation moderating particularly in food prices. Retail inflation dropped, giving the central bank a room to have a more accommodative stance without actually contravening its inflation targets.

Boost Liquidity: The rate reduction is combined with steps to provide liquidity to the banking system, so banks have the required cash to lend more money.