India’s Forex Reserve

It is big news that India’s foreign exchange reserves have increased by $140 million to touch an all-time high of $642.631 billion during the week that ended in March 2022. According to the Reserve Bank of India, the previous peak was recorded in September 2021, when the country’s foreign exchange reserves had reached $642.453 billion. The reserves took a hit as the RBI deployed the kitty to defend the rupee amid pressures caused primarily by global developments since last year. What is also significant is that India’s gold reserves have also risen to USD 51.487 billion. While this development has reflected in a very positive manner on the Indian economy, it is pertinent to keep in mind that the country’s economy has not only recovered very speedily in the immediate post-COVID situation, but has soared rather unexpectedly high in the past two years. Economists have pointed out that by shoring up the reserves, the RBI is trying to insulate the country from external shocks arising from volatile energy prices and supply chain disruptions, prevent excessive volatility in the rupee, and reassure foreign investors about India’s ability to service its external debt service payment obligations. It has also been pointed out that India’s reserves in the financial year so far (up to March 22, 2024) have been boosted mainly due to an increase in foreign currency assets (up $58.572 billion) and gold holdings (up $6.287 billion) during the said period. Foreign currency assets comprise multi-currency assets—securities, deposits with other central banks and BIS, and deposits with commercial banks overseas—that are held in multi-asset portfolios. With a foreign exchange reserve buffer, investors have greater confidence in India’s ability to service its external obligations. What is also worth noting is that India currently holds the fourth largest foreign exchange reserves in the world. While India’s foreign exchange reserves are a topic of interest for economists and policymakers alike, Forbes has remarked that over the years, India’s Forex reserves have been driven by various factors, including a surge in foreign direct investments, growth in IT and service exports, and prudent economic policies. It has also praised the government and RBI for utilising the reserves to manage exchange rates and monetary policies effectively.