Weekly RBI Tracker: Forex Reserves Rebound

5 Aug 2025 , 10:13 AM

Forex Reserves Rebound; Banking Liquidity Conditions improve:

After falling for 3 consecutive weeks, forex reserves rebounded in the week ending 25th July. Both Foreign Currency Assets and Gold reserves improved. Also, liquidity in the banking system continues to improve as SDF utilisation falls. The falling SDF utilisation is a likely indication of improving credit demand. As per the prior week’s data, credit growth had improved to the highest levels since May.

Key indicators for the upcoming week include the RBI’s commentary from its monetary policy meeting and the fresh data on credit growth.

Forex Reserves improve by USD 2.7 bn:

After 3 consecutive weeks of decline, India’s reserves rebounded in the week ending 25th July. Week on Week, they improved by USD 2.7 bn to reach USD 698.2 bn. The increase was due to both an increase in foreign currency assets and gold reserves. The total value of Foreign Currency Assets increased by USD 1.3 bn to USD 588.9 bn. Gold reserves increased to USD 85.7 bn. Gold reserves have increased substantially YTD. In 2025, while gold accounted for only 12% of total reserves, it contributed to 25% of incremental reserves.

Figure: Forex reserves rebound

Source: RBI

 

SDF utilisation continues to drop:

The latest data indicate that SDF utilisation continues to fall sharply, after peaking in July. Since April, Indian banks have shown a sharp preference to park excess funds in SDF. This had led to SDF balances (20D rolling average) increasing to their highest levels in 3 years.

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 1trn. This moderation also coincides with the pickup in credit growth.

Figure: SDF utilisation has started to moderate

Source: RBI

What is SDF – A Primer

The SDF is a non-collateralised instrument which 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 was the highest since early May – A Recap:

RBI releases credit growth data every fortnight. As per the last release, credit growth seems to be on an improving trend. India’s banking credit had inched up and was above 9.8%. This was the highest level since May and likely indicates RBI’s policy rate cuts taking effect.

Prior to the current release, credit growth had moderated and raised concerns over whether the RBI’s jumbo 50bps rate cut was enough. After a brief improvement immediately following the rate cut, credit growth had moderated.

The jumbo rate cut by the RBI was partially driven by the sharp fall in credit growth from above 10% to below 9% as of the end of May. This was the worst credit growth witnessed in three years. The sharp fall happened despite the RBI’s start of the cut cycle in 2025. RBI cut repo rate already by 50bps in 2025 (prior to the 50bps rate cut in June). Anaemic demand for credit, coupled with a lack of speedy transmission of rate cuts, was the likely culprit.

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 the services sector. The high pace was unsustainable and carried risks of asset quality deterioration and overheating in pockets of the economy.

Figure: Credit Growth is improving

Source: RBI

 

Credit Deposit Ratio spikes:

As per the latest data release, the credit deposit ratio has reversed its trend and spiked. The pickup in recent credit growth is the likely reason. After moderating to ~77.5%, it has spiked to 79% as per the latest data release. This is among the highest credit deposit ratios seen in the past 3 years.

Figure: Credit Deposit Ratio Spikes

Source: RBI

 

RBI’s repo rate history:

The RBI’s monetary policy committee starts its 3-day monetary policy review meeting this week. After the jumbo 50bps rate cut in June, commentary indicates that further easing is unlikely. A key reason for a pause in rate cuts is waiting for monetary transmission to take place before further rate cuts.

In 2025, the RBI has already cut the repo rate by 100bps. The last cut of 50bps had come as a positive surprise vs the expectation of 25bps. The cut was also significant as it took the repo rate to levels not seen since 2022. In addition to the sharp rate cut, there was also a notable change in stance in the RBI’s monetary policy. It changed from ‘Accommodative’ to ‘Neutral’. In essence, it 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 9.8%.

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 and 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 the 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 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.