Why are the forex reserves of the Indian economy falling so sharply?

In a matter of few weeks, India’s forex reserves depleted from $647 billion to $593 billion. OK, this is nothing close to the kind of depletion that Russia or Saudi Arabia have seen, but this is something to worry about. IN a sense it is due to the heavy support offered by the RBI to the rupee. Typically, the RBI uses its forex reserves to sell dollars in the spot market so as to temper dollar value. But recently, demand from banks and importers has been too high.

In reality, RBI does not get into exchange rate determination, since the rupee is just a managed free flat. However, it does intervene to prevent any inordinate weakness or strength in the rupee. We have seen rupee weaken from Rs73/$ to Rs77.70/$ and that is not great news as India imports 85% of its daily crude needs. When this combines with FPI outflows, you have the story of RBI reserves depleting.