Amid the rapidly weakening rupee, the Reserve Bank continued to sell dollars to prevent it from falling to the psychologically sensitive 86-mark. This led to a significant drop in forex reserves for the fifth consecutive week, reaching a ten-month low.

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The reserves fell to a 10-month low of $634.59 billion for the week ending January 3, losing $5.7 billion from the previous week, data from the Reserve Bank showed on Friday.

The reserves also lost due to the valuation changes in foreign currency assets, which are the biggest components of the overall reserves and are caused by the central bank’s intervention in the forex market as well as the appreciation or depreciation of foreign assets held in the reserves.

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The reserves include the reserve tranche position in the International Monetary Fund and those held in gold.

The forex reserves declined by $5.7 billion in the reported week, after falling by a cumulative $17.8 billion in the prior three weeks. Reserves have fallen by about $70 billion from their all-time high of $704.89 billion in late September.

The central bank intervenes on both sides of the forex market to curb undue volatility in the rupee.

The magnitude of the RBI’s forex intervention since October has been “substantial” and is resulting in “adverse effects”, such as tighter banking system liquidity and higher short-term rates at a time of weakening growth, Nomura analysts said, adding this, in turn, is leading to more capital outflows and possibly “dollar hoarding” in anticipation of further depreciation in the rupee.

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Meanwhile, the rupee plumbed to a new low of 85.97 intraday and settled at 85.9650 on Friday. The currency fell 0.2 percent this week, its tenth consecutive weekly fall. The unit had closed flat at 85.8788.

In the past three months alone, the rupee has depreciated to 85.9738 against the dollar from 83.9688 on October 3, 2024.

Traders said the rupee hit record low due to persistent FII outflows from equities, strong dollar demand from oil importers after a surge in crude prices, and rising US treasury yields.

Equities ended in the red for the fifth day Friday, which only added more salt to the bleeding wound. The Sensex ended down 241.30 points or 0.31 percent at 77,378.91, and the Nifty closed down 95 points or 0.40 percent at 23,431.50.

The equity market continued the  downward ho amidst the rupee scaling new lows on strengthening dollar which further dampened investor sentiment. Amid concerns of subdued economic growth and expectations of a slowdown in the quarterly earnings, investors cut their bet on banking and mid and   small cap stocks, said Mehta Equities said in a note.