Tuesday, 07 Apr, 2026
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For FY26, total reserves rose by $22.72 billion, driven by higher gold holdings, even as foreign currency assets—the largest component—declined by nearly $14 billion
India’s foreign exchange reserves have come under pressure, falling by $30.5 billion since the onset of the West Asia conflict in late February. The decline reflects the Reserve Bank of India’s active intervention to smooth volatility as the rupee weakened more than 4 per cent against the dollar in March.
The headline numbers remain reassuring at first glance. Total reserves stood at $688.05 billion as of March 27, down $10.28 billion for the week, after touching a record $728.5 billion at the end of February. The fall was led by a $6.62 billion drop in foreign currency assets and a $3.66 billion decline in gold reserves.
But the underlying story is more complex. The RBI appears to be using its reserves as a buffer to prevent disorderly currency movements rather than to defend any specific level. This marks a continuation of its calibrated approach—allowing gradual depreciation while stepping in to curb sharp swings.
The composition of reserves is also shifting. For FY26, total reserves rose by $22.72 billion, but this increase was largely driven by gold rather than foreign currency assets, which actually fell by nearly $14 billion. Over the past three years, the share of foreign currency assets has declined by 8 percentage points, while gold holdings have surged, driven mostly by rising prices rather than significant volume additions.
This shift matters. Gold provides diversification and a hedge against global uncertainty, but it is less liquid than foreign currency assets when immediate intervention is required. In periods of sustained currency pressure, the quality and usability of reserves become as important as the headline size.
There is also a less visible layer of stress. While reserves provide an import cover of about 11 months, this shrinks to roughly nine months when accounting for the RBI’s forward book. The central bank’s net short dollar position in forwards rose sharply to $77.25 billion by February-end and is estimated to have approached $100 billion in March. This indicates that a portion of intervention has been deferred into the future, effectively borrowing time to manage current volatility.
The drivers of pressure are external as much as domestic. Rising geopolitical tensions have pushed up crude prices, widening India’s trade deficit and increasing dollar demand. At the same time, capital flows have remained uncertain, limiting the inflow cushion that typically supports the rupee.
Yet, the situation is far from a crisis. Even after the recent drawdown, India’s reserve buffer remains among the strongest in emerging markets. The RBI retains ample firepower to manage volatility, and its strategy suggests a focus on stability rather than resistance.
The key risk lies in persistence. If global uncertainties linger, oil prices remain elevated, and capital inflows stay muted, the pressure on both reserves and the rupee could continue. In that scenario, the central bank may have to balance between further reserve drawdowns and allowing a sharper currency adjustment.
For now, the decline in reserves signals not weakness but usage. It shows the cost of insulating the domestic economy from external shocks. The real test will be how long this cushion can be deployed without eroding confidence in India’s external stability.
