In the weekly statistical supplement released today, the RBI said that foreign exchange reserves were $33.289 billion on June 18, down from the week-ago level of $33.489 billion. According to analysts the drop was expected as the RBI governor Bimal Jalan said on Friday that the central bank had sold dollars to the State Bank of India last week.

Speaking to reporters after a conference on rural development, Jalan said the central bank had deliberately followed a policy of keeping reserves at a high level and the Bank bought dollars from the market in the last March, April and May. He described the current volatility in the forex market as a "temporary hiccup".

"In fact, we bought as much as $2.5 billion during these three months. Last week, however, RBI sold dollars to State Bankof India in order to meet some extra demand," a central bank statement quoting the governor said.

The statement rescued the rupee from its 10-month lows of 43.43. It closed at 43.315/33 per dollar on Friday. The rupee has weakened by more than one per cent since late May when news of the conflict in Kashmir first hit financial markets. "The Kashmir conflict is driving importers to increase their hedging horizons and cover ratios. The RBI's decision to sell dollars is to curb any excessive volatility or undue bearishness on the rupee," said treasury economist of Standard Chartered Bank Vasan Shridharan.

Jalan said that the central bank would continue to keep a watch on the markets and take appropriate measures whenever need arise. "Except for some temporary hiccups, financial markets are functioning normally and overall conditions are satisfactory. RBI will continue to monitor the position and as in the past take appropriate measures when necessary," Jalan said adding that the economy would not be hurt bythe Kargil crisis.

"Our policy is to keep forex markets orderly and meet temporary demand-supply gaps that emerge from time to time," he said. While the depletion in the foreign currency assets was $200 million, dealers said it was likely the central bank had sold a lot more and adjusted the spot position by receiving forward dollar premiums (buy-sell swaps).

During the same period ended June 4, credit extended by scheduled commercial banks to the food sector increased by Rs 621 crore, while non-food credit was lower by Rs 3,349 crore, the supplement said.