Between the end of February and March 11, $6.5 billion were added to the country’s forex reserves. This has been the trend over the last 12 months; the Reserve Bank of India has been adding to the reserves at every opportunity.

It is no surprise, then, that India’s foreign exchange reserves are close to record highs even as reserves of other emerging economies have declined over the last 12 months.

However it might be hard to sustain this trend over the rest of 2016 given the expected volatility in foreign fund flows and NRI remittances. The redemption of FCNR (B) swaps issued in 2013 and due in September 2016 can also lead to a large outflow.

Better than peers India’s foreign currency reserves (excluding gold) rose close to 6 per cent in the last 12 months. This is in contrast to other emerging economies, which have recorded a decline in reserves as they battled to control currency depreciation.

China has recorded the sharpest fall (15.7 per cent), while other countries such as Malaysia (13.49 per cent), Indonesia (11 per cent) and Singapore (3.15 per cent) also witnessed depletion of reserves.

The accretion to reserves in the recent past has taken place under tough conditions. The rupee lost more than 6 per cent in 2015-16, and foreign portfolio flows turned negative in this period with an outflow of $15.3 billion. Foreign direct investments have been the saving grace this fiscal year, with a robust 26 per cent increase in the 11 months of FY 16.

The RBI has, however, net purchased $9 billion through forex market interventions between April 2015 and January 2016. While this is just a third of the dollar purchases in the corresponding period of FY 15, it shows the central bank does not want to let go of any opportunity to bolster reserves.

This could be due to several reasons. One, the $26 billion worth of FCNR (B) swaps issued to banks to fight rupee volatility in 2013 will mature in September this year. Even if half this number is redeemed, there could be an outflow of $13 billion towards the last quarter that needs to be accounted for. While the RBI could consider offering to roll over these deposits, not everyone might take up the offer.

Two, with the Federal Reserve beginning its interest rate hikes, foreign portfolio flows are beginning to stall and there are risks of higher outflows in the coming months. Indranil Sen Gupta and Abhishek Gupta of Bank of America Merrill Lynch point out in a report that FPI debt and equity investments have risen to 121 per cent of foreign exchange reserves, from 72 per cent in 2007, increasing the risk from outflows.

Three, the increase in reserves is also partly due to the fall in crude prices, which can reverse, says Ritesh Jain, CIO, Tata Asset Management. “The RBI will try to increase the reserves, especially when the rupee appears to be over-valued in REER (Real Effective Exchange Rate) terms,” says he.

Four, “there is risk of a slowdown in inward remittances as India gets almost 50 per cent of the remittances from the Middle East. The downside of lower oil prices could be lower remittances from the Middle East,” says Jain.

The rupee has also been relatively stronger compared to its emerging market peers. This prevents the RBI from losing precious forex reserves in fighting cross-currency strength from a stronger US dollar, says the Bank of America Merrill Lynch report.

Liquidity in the economy Since foreign exchange interventions also result in injecting liquidity in the economy, fewer interventions are resulting in reduced liquidity. To make up for the short-fall, the RBI has to inject liquidity through open market operations (buying/selling G-secs from the domestic market).

“The RBI will need to step up OMO purchases to ₹1,80,000 crore in FY17 from around ₹1,10,000 crore in FY16,” writes Indranil Sen Gupta. This is needed to bring down bond yields and aid rate-cut transmission.