India’s forex reserves swell by $12.5 billion to cross $700-billion milestone after seven-week surge

India's foreign exchange reserves (forex) crossed the $700 billion milestone for the first time on record, extending its winning streak to seven straight weeks. India is now only the fourth economy in the world to cross $700 billion in forex reserves after China, Japan, and Switzerland.

The forex kitty jumped by $12.588 billion to hit a fresh lifetime high of $704.885 billion for the week ended September 27—in their biggest weekly increase since mid-July 2023, driven by valuation gains and dollar purchases made via the Reserve Bank of India (RBI).

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"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," said Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry (PHDCCI).

India's forex reserves: Key Metrics

In the week corresponding to the latest reserves data, the Indian rupee strengthened past 83.50 to the dollar, likely spurring the RBI to shore up its reserves. In the previous reporting week, the forex kitty had swelled by $2.838 billion to $692.296 billion. 

India's forex reserves have ballooned by $87.6 billion so far in 2024, already more than the nearly $62 billion increase over the whole of last year. This buffer of foreign exchange reserves helps insulate domestic economic activity from global shocks.

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According to the latest RBI data, India's foreign currency assets (FCA), the largest component of forex reserves, increased by $10.468 billion to $616.154 billion. Expressed in dollar terms, the FCA include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves increased by $2.184 billion to $65.796 billion during the week. The Special Drawing Rights (SDRs) were up by $8 million to $18.547 billion. India's reserve position with the International Monetary Fund (IMF) was down by $71 million to $4.387 billion in the reporting week. The surging reserves have been facilitated by overseas inflows into India’s stocks and bonds.

As per estimates, India's forex reserves are sufficient to cover over a year of projected imports. In 2023, India added about $58 billion to its forex reserves. In contrast, reserves saw a cumulative decline of $71 billion in 2022.

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Foreign inflows hit $30 billion so far this year, led mainly by investments in local debt after they were included in a key JP Morgan index. RBI Governor Shaktikanta Das has repeatedly stressed the need to build a forex buffer to protect against market volatility.

Overseas inflows into the nation’s stocks and bonds have helped the RBI boost its stockpile to $705 billion, the fourth highest in the world. This amount provides stability to the rupee against external shocks, with the RBI using its reserves to limit extreme swings in the currency, which is hovering near a record low.

“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,” said Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings.

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According to Bank of America, the reserves will likely rise to $745 billion by March 2026, giving the central bank more potential firepower to influence the rupee. The analysts wrote that the growth in forex reserves will be driven by a balance-of-payments surplus owing to a smaller current account deficit.

The country has been boosting its forex reserves since 2013 when foreign investors pulled out due to weak macroeconomic fundamentals. Since then, stricter inflation control, higher economic growth, and narrower fiscal and current account deficits have helped draw in foreign funds, boosting reserves.

“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,” said Dr. Manoranjan Sharma.

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India's forex reserves monitored by RBI

Forex reserves (FX reserves) are assets held by a nation's central bank or monetary authority. They are generally held in reserve currencies, typically the US dollar and, to a lesser extent, the Euro, Japanese Yen, and Pound Sterling.

The RBI closely monitors the forex markets and intervenes to maintain orderly market conditions and keep the rupee in a narrow trading range, making it the least volatile emerging market currency. The RBI intervenes through liquidity management, including the sale of dollars, to prevent a steep rupee depreciation. 

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A decade ago, the Indian Rupee was one of the most volatile currencies in Asia. However, it has since become one of the most stable. The RBI has been strategically buying dollars when the rupee is strong and selling when it is weak. A less volatile rupee makes Indian assets more attractive to investors, who can expect better performance with more predictability.

The RBI aims to contain excessive volatility in the exchange rate without reference to any pre-determined target level or band. RBI Governor Shaktikanta Das, when questioned about the rupee's lack of volatility last month, said that higher volatility did not benefit the economy.

With inputs from ANI, Bloomberg, PTI, and Reuters