Sunday, 23 Mar, 2025
Foreign currency maintained by a country's central bank is known as its Forex reserves. It offers protection from unforeseen external shocks. Image Source: IANS
After China, Japan, and Switzerland, India's economy is currently just the fourth in the world to surpass $700 billion in foreign exchange reserves.
India’s foreign exchange reserves have crossed the mark of $700 billion for the first time. According to the most recent data released by the Reserve Bank of India (RBI), India's foreign exchange reserves jumped by $12.58 billion to reach an all time high of $704.88 as of September 27. According to the weekly statistical supplement released by the RBI, gold reserves rose by $2.18 billion, bringing the total to $65.79 billion. According to the apex bank, the Special Drawing Rights (SDRs) increased by $8 million to $18.54 billion. India's reserve position with the International Monetary Fund (IMF) was down by $71 million to $4.38 billion in the reporting week.
India's foreign exchange reserves have increased significantly by $87.6 billion in 2024 thus far, surpassing the approximately $62 billion surge for all of the previous year. The foreign exchange reserves act as a buffer between the domestic economy and external shocks.
After China, Japan, and Switzerland, India's economy is currently just the fourth in the world to surpass $700 billion in foreign exchange reserves. Foreign investments in India's bonds and stocks have contributed to the country's rising reserves
Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry (PHDCCI) said, “India’s standing in the global economic ecosystem is being strengthened by all-time high forex amid growing geopolitical vulnerabilities. Government policy support, a strong monetary policy stance, and robust capital markets propel India on a higher growth trajectory to create confidence among trade and industry.”
India is estimated to have enough foreign exchange reserves to cover more than a year's worth of expected imports. About $58 billion was added to India's foreign exchange reserves in 2023. Conversely, in 2022, reserves witnessed a $71 billion total drop. This year, foreign inflows have totaled $30 billion, primarily from investments in local debt that were made when they were added to a significant JP Morgan index. In order to guard against market volatility, RBI Governor Shaktikanta Das has emphasized the importance of creating a forex buffer on several occasions.
Source: Reserve Bank of India
Foreign currency maintained by a country's central bank is known as its Forex reserves. It offers protection from unforeseen external shocks. Typically, reserve currencies like the dollar are used to maintain it. The fundamental goal of holding foreign exchange reserves is to preserve confidence in the monetary and exchange rate management policies as well as to preserve currency liquidity to absorb external shocks. Also, having sufficient reserves helps reassure investors in times of extreme uncertainty, such as wars or unrest, portrays a positive image, and reassures trading countries.
An increase in the forex reserves can either be due to an inflow of US dollars or due to appreciation of foreign assets held in the reserves. On the other hand, a decrease in forex reserves might be due to outflow of USD or depreciation in valuation of assets held in the reserves. Forex reserves also include India's reserve tranche position in the International Monetary Fund and help provide the RBI a cushion to deal with external shocks.
Commenting on India’s forex reserves, Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings said, “Given this inexorable trend, it is expected that India’s forex reserves will rise to $745 billion by March 2026. Such healthy reserves strengthen buffers against contingent external risks in a volatile international market, giving RBI considerably more flexibility and leeway in currency management. This welcome development would also have a salubrious impact on the current account deficit and strengthen the import cover well beyond six months.”
“India’s forex reserves have been on an upswing since 2013 when India was part of the “fragile five” category and foreign investors exited because of weak macroeconomic fundamentals. Since then, an effective check of the inflationary spiral, accelerated economic growth, squeezing of fiscal and current account deficits, and abiding faith in the India growth story have led to a surge of foreign funds,” he added.
The Indian Rupee was one of Asia's most volatile currencies ten years ago. But over time, it has grown to be among the most reliable. When the rupee is strong, the RBI has been strategically buying dollars, and when it is weak, it has been selling. Investors find Indian assets more appealing when there is less volatility in the rupee, as they may anticipate more stable and superior performance.
In the meantime, rising oil prices are a result of worldwide tensions, especially in the Middle East after Iran attacked Israel with missiles. Concerns regarding possible disruptions in the oil supply have been raised by this conflict, which may have an impact on global interest rate decisions.
The RBI confronts difficulties as global central banks, particularly the US Federal Reserve, start to loosen monetary policy. Even if the Indian economy has proven resilient, GDP and inflation may still be impacted by external threats like growing geopolitical tensions. It follows that the RBI will likely make careful decisions about policy going forward.
India's economy is still growing, but there are still problems associated with inflationary pressures and worldwide unpredictability. Even though inflation is currently on the decline, the RBI is nonetheless concerned about food and fuel costs and is keeping a close eye on these developments before making any big adjustments to its monetary policy.
