By T N Ashok
India’s foreign-exchange reserves have suffered a substantial reversal after reaching a record high in early September 2026. The latest Reserve Bank of India (RBI) figures, released on October 23, put the reserves at $721.016 billion for the week ended October 16, down from $785.706 billion on September 4. That is a decline of approximately $64.7 billion in six weeks.
The decline is striking, but it requires careful interpretation. Foreign-exchange reserves are not a running tally of foreign investors’ confidence in the government. They are a stock of foreign assets held by the central bank, affected by currency-market intervention, changes in the dollar value of assets denominated in other currencies, and the movement of foreign funds into and out of the country.
Three developments are particularly important: the RBI’s efforts to manage pressure on the rupee, substantial withdrawals by foreign portfolio investors from Indian equities, and the exceptional circumstances that helped push reserves to their September peak.
The political controversy surrounding Chief Election Commissioner Gyanesh Kumar, the allegations over voter-list deletions, and the ensuing student protests form another part of the story. They raise questions about institutional credibility and investor perceptions. But establishing that these developments caused the reserve decline requires evidence beyond the coincidence of their timing.
The September peak was exceptional — and the subsequent fall needs explaining. The first clue lies in how the reserves reached their record level. The September 4 peak was supported by substantial foreign-currency inflows associated with a special concessional swap arrangement for deposits from non-resident Indians. Banks reportedly raised nearly $133 billion through the programme, according to published reports. The reserves subsequently began to fall.
The distinction matters. A reserve peak partly supported by an exceptional financing arrangement is not necessarily a permanent addition to the country’s underlying capacity to earn foreign exchange. Depending on the terms and accounting treatment of the arrangement, foreign-currency resources can be accompanied by corresponding liabilities or future obligations. The subsequent decline therefore cannot automatically be interpreted as $64.7 billion of foreign investors fleeing India.
The RBI reported that foreign-currency assets, the largest component of the reserves, fell to $591.847 billion in the week ended October 16, a weekly reduction of $5.758 billion. Gold holdings, by contrast, increased by $706 million to $105.8 billion.
That breakdown points to foreign-currency movements as the immediate source of the latest decline. Market analysts have attributed the wider retreat partly to the deployment of FCNR(B) resources and the RBI’s sale of dollars to manage the rupee. In other words, the central bank may be spending reserves precisely because it is trying to prevent a more disorderly decline in the currency.
Foreign portfolio investors, or FPIs, have undeniably become an important source of pressure. Unlike foreign direct investors, who establish businesses, acquire substantial stakes or commit capital to longer-term projects, portfolio investors can sell listed shares and move their money elsewhere relatively quickly. When large funds withdraw simultaneously, their sales depress share prices and can increase demand for dollars as the proceeds are repatriated.
The latest figures indicate substantial selling. Foreign investors withdrew ₹35,861 crore from Indian equities in September and another ₹44,166 crore during the first part of October. Their net equity outflows for 2026 had crossed ₹3 lakh crore by October 11, according to figures reported by the Press Trust of India.
Foreign-exchange reserves $721.02bn- Week ended October 16- Decline from record – $64.69bn- September 4 to October 16- FPI equity outflows – ₹3.04 lakh crore – Reported year-to-date figure as of October 11- Latest rupee reference- ₹94.95/$- October 23 close, approximately Sources: RBI reserve data, reported FPI flows and published exchange-rate data.
But there is a crucial qualification: portfolio outflows and reserve depletion are related, not identical. When a foreign investor sells Indian shares to another Indian investor, the transaction does not necessarily cause an equivalent outflow of foreign exchange. Reserves are affected when foreign-currency transactions require the central bank to supply dollars, or when other balance-of-payments flows and valuation changes alter the reserve position.
The scale of FPI selling nevertheless tells us something important: India is competing for global capital in a less favourable environment. Higher US Treasury yields, a stronger dollar, expensive oil and attractive technology-sector opportunities elsewhere can all encourage investors to reduce exposure to Indian equities. Indian shares can suffer even when the country’s long-term growth prospects remain attractive. The question is whether these withdrawals are merely cyclical or reflect a deeper reassessment of India’s earnings outlook, market valuations and policy risks.
The stock market provides a visible measure of the pressure. On October 23, the BSE Sensex closed at 73,123.83, while the Nifty 50 ended at 22,600. Both registered weekly losses as higher crude prices and concerns about earnings weighed on investor sentiment.
The damage was more severe among smaller companies. Reuters reported that the Nifty Midcap index fell 5.6% and the Smallcap index plunged 7.3% over the week, their worst weekly performances in approximately 20 months.
A separate market report estimated that BSE-listed companies lost approximately ₹16.1 lakh crore in market capitalisation during the week ending October 23, taking the aggregate value from about ₹467.9 lakh crore to ₹451.8 lakh crore.
These losses should not be confused with money physically leaving the country. Market capitalisation is the value assigned to outstanding shares at prevailing market prices. It can fall dramatically without the entire amount being withdrawn from the financial system.
Nor does a decline in the market value of listed companies establish that their underlying businesses have deteriorated by the same percentage. Investors may be reducing the multiples they are willing to pay for future earnings, anticipating higher costs or demanding a larger premium for risk.
Nevertheless, the breadth of the decline matters. A correction confined to a few highly valued technology or consumer companies would tell a different story from a sell-off affecting banks, manufacturers, consumer businesses and smaller firms simultaneously. India now faces the challenge of persuading investors that its corporate earnings can withstand higher energy costs, currency weakness and more expensive financing.
One of the most direct pressures comes from the international energy market. Brent crude rose above $114 a barrel on October 23 amid fears of supply disruptions following attacks involving Yemen’s Houthis and Saudi Arabian energy infrastructure. The increase raised concerns about inflation, corporate input costs and India’s external balance.
India imports a substantial proportion of its crude oil requirements. When oil becomes more expensive, Indian refiners, airlines, transport operators, manufacturers and other energy-intensive businesses face higher costs. Unless these costs can be passed on to consumers, profit margins narrow.
The national consequences are equally important. Higher oil prices increase the dollar value of imports, potentially widening the merchandise trade deficit. Importers need dollars to pay suppliers, adding to demand for foreign currency. If export earnings, services receipts and other inflows do not compensate, the current account comes under pressure.
The RBI may then have to decide how much volatility in the rupee to tolerate and how much foreign exchange to sell to smooth the adjustment. This is why a reserve decline accompanied by a falling currency can be more significant than either development in isolation. It suggests the central bank is managing competing priorities: currency stability, liquidity and the preservation of an adequate external buffer.
Is the rupee still falling against the dollar? The answer is that the rupee has weakened substantially over the longer term, although its daily movements have not been uniformly downward.
On October 23, the rupee closed at approximately ₹94.95 to the dollar, according to published exchange-rate data. That compared with approximately ₹87.82 a year earlier, implying a depreciation of around 8.1%. Earlier in October, the exchange rate had approached ₹96.8 to the dollar. There was, however, a partial recovery in mid-October. The rupee strengthened from its early-month lows before losing ground again as oil prices climbed and dollar demand returned.
The distinction between depreciation and volatility is important. A currency that moves in both directions can still be on a longer-term downward trajectory.
A weaker rupee has mixed effects. Exporters and Indian recipients of foreign-currency earnings may benefit when those earnings are converted into rupees. But imports become more expensive, including oil, electronics, industrial machinery and other goods priced in dollars. Foreign-currency debt servicing can also become costlier for Indian borrowers.
Are weaker FDI and slower remittances also responsible? Both deserve examination, but they must be distinguished from portfolio flows. Foreign direct investment (FDI) is generally more durable than equity-market investment. It includes capital committed to establishing or expanding businesses, acquiring significant ownership stakes and developing productive capacity. A sustained slowdown in net FDI would be concerning because it could indicate weaker confidence in future returns or a less attractive investment environment.
However, gross FDI inflows alone do not tell the complete story. Divestments, repatriation of profits, outward investment by Indian companies and other transactions also affect net flows. To establish whether FDI contributed materially to the latest reserve decline, comparable RBI balance-of-payments figures are needed. The weekly reserve data alone cannot answer that question.
Remittances from Indians overseas are another important source of foreign exchange. They support household consumption, savings and the country’s external accounts. But they should not be confused with the special FCNR(B) deposit arrangement that helped lift reserves in September. A deposit or swap-related inflow is financially different from a household remittance.
There is no sufficient evidence in the latest weekly reserve figures to conclude that expat remittances suddenly slowed and caused the decline. The responsible conclusion is that portfolio selling and RBI currency intervention are documented elements of the current picture, while the specific contributions of net FDI and remittances require separate flow data. The political storm over voter deletions: a confidence issue, not a proven financial cause. The political backdrop is nonetheless serious.
An Indian Express investigation reported that two of the three Election Commissioners had lodged 14 formal objections to decisions taken under Chief Election Commissioner Gyanesh Kumar over ten months. The reported dispute included concerns about changes to voter-registration procedures, the centralisation of electoral-roll systems and the Special Intensive Revision process affecting approximately 13 crore voter names.
These developments can affect the country’s international image. Foreign investors pay attention not only to economic growth and corporate profits but also to institutional predictability, the rule of law, political stability and the protection of property and contractual rights. However, there is a difference between saying that political uncertainty may influence sentiment and asserting that it caused the reserve decline.
The timing of the protests overlaps with the financial deterioration, but the reported evidence identifies more immediate market pressures: foreign portfolio outflows, elevated oil prices, dollar demand and RBI intervention. There is no published evidence cited here quantifying how much, if anything, investors withdrew specifically because of the voter-roll controversy or police action.
A credible analysis must leave that question open rather than attribute every adverse economic movement to domestic political conflict.
What does the decline mean for India’s economic resilience? India’s reserves remain substantial by historical standards. A total of $721 billion provides a considerable external buffer, although adequacy should be judged against import requirements, short-term external debt, the composition of reserves and potential capital outflows—not the headline number alone.
The immediate concern is the speed of the reversal. A fall of approximately $64.7 billion in six weeks warrants close monitoring, especially when the currency is under pressure and foreign investors are selling equities.
The RBI must balance intervention against the need to preserve adequate reserves. The government, meanwhile, must address the underlying economic vulnerabilities: energy dependence, the competitiveness of exports, the stability of capital inflows and the ability of Indian businesses to generate earnings that justify their valuations.
Political institutions matter to this task, too. A predictable regulatory environment and confidence in independent constitutional institutions can support long-term investment. Equally, credible investigation of allegations, transparent voter-roll procedures and proportionate policing can strengthen confidence in India’s democratic system.
That does not mean the foreign-exchange market is a referendum on the government. Global oil prices, US interest rates and investors’ choices between competing markets can dominate short-term movements. But a government that aspires to attract sustained foreign investment cannot afford to treat concerns about institutional credibility as economically irrelevant.
The central conclusion is that India’s reserve retreat is a warning signal, not proof of a financial crisis. The documented combination of exceptional earlier inflows, subsequent reserve use, foreign portfolio selling, expensive oil and pressure on the rupee explains much of the immediate picture. Whether the political controversy becomes a material additional cost to the economy will depend on how it develops—and whether the government can restore confidence through transparent institutions, credible policy and a stable environment for investment.
The decisive test is not whether reserves recover for a week or the rupee briefly strengthens. It is whether India can sustain foreign-exchange earnings, attract productive capital and retain investor confidence without having to rely continually on central-bank intervention to smooth the currency’s decline. (IPA Service)
