India’s foreign exchange (Fx) reserves have soared in FY24 so far after declining in FY23, reflecting the Reserve Bank of India’s strategy to build them up for a rainy day.

By shoring up the reserves, the central bank 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.

The reserves jumped $64.182 billion since March-end 2023 till March 22, 2024 against a decline of $28.531 billion in the year ago period.

As on March 22, 2024, India’s fx reserves stood at a record $642.631 billion, surpassing the previous peak of $642 billion in September 2021. The country holds the fourth largest fx reserves in the world after China, Japan and Switzerland.

The biggest single year accretion to the reserves in recent times was in the March-end 2020 to March-end period when India added about $101 billion.

The increase in fx reserves in the financial year so far is the second highest among major foreign exchange reserves holding countries, according to RBI’s latest monthly bulletin.

India’s reserves in the financial year so far (up to March 22, 2024) have been boosted mainly due to increase in foreign currency assets (up $58.572 billion) and gold holding (up $6.287 billion) during the said period.

The other two components of reserves declined – special drawing rights (down $173 million) and Reserve Tranche position in the IMF (down $503 million).

Foreign currency assets comprise multi-currency assets – securities, deposits with other central banks & BIS, and deposits with commercial banks overseas – that are held in multi-asset portfolios.

Strong buffer

Gold reserves include gold held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS) and gold held domestically.

SDR reflects India’s commitment to provide resources under the IMF’s New Arrangements to Borrow (NAB). The Reserve Tranche Position (RTP) is equal to a member-country’s quota less the IMF’s holdings of the member’s currency in the GRA (general resources account).

“In the Reserve Bank, we have embarked on strengthening and building up higher reserves.... Individual emerging market economies have to insulate and protect their economies from the spillovers of global currency movements and fluctuations.

“...With a foreign exchange reserves buffer, the investors have greater confidence in India’s ability to service its external obligations.” RBI Governor Shaktikanta Das told a business TV channel in an interview in January 2024.

Emphasising the strength of India’s forex reserves, Das, in a recent interview with another business TV channel earlier this month, noted that the Reserve Bank will be able to handle the kind of inflows or outflows associated with the inclusion of sovereign bonds in global indices mainly because India has a strong buffer of fx reserves.

“India holds the fourth largest FX reserves in the world...which seems comfortable as a reserve adequacy metric,” per a UBS Securities India report.

Bank of Baroda economists noted that the foreign exchange reserves will provide the necessary cushion to cover against any adverse external shock.