Source: Hindustan Times

India has reached a significant milestone by crossing the $700 billion mark in foreign exchange( ForEx) reserves, joining the ranks of only three other countries—China, Japan, and Switzerland—that have achieved this feat. As of the last week of September 2024, the country’s foreign exchange reserves stood at a record $704.89 billion, after a steady climb over the past seven weeks. This is the highest ever forex reserve level for the country, reflecting its strong economic position and investor confidence.

Key Factors Behind the Surge

India’s forex reserves have increased by $87.6 billion so far in 2024, which is already higher than the $62 billion increase for the entire year of 2023. The recent spike of $12.6 billion in a single week, ending on September 27, 2024, marks the largest weekly gain since mid-July 2023. This surge can be attributed to multiple factors, including revaluation gains, the Reserve Bank of India’s (RBI) dollar purchases, and foreign investments in the country’s stock and bond markets.

1. Foreign Currency Assets (FCAs): FCAs form a significant portion of India’s forex reserves. The increase in FCAs by $10.4 billion in the past week alone has pushed the total to $616 billion. The valuation gains were largely due to the decline in U.S. Treasury yields, a weaker dollar, and an increase in gold prices.
2. Gold Reserves: India’s gold reserves also contributed to the surge, rising by $2 billion to reach a total of $65.7 billion, demonstrating the central bank’s strategy to diversify its reserve base.
3. Foreign Portfolio Investments (FPI): The inflow of $30 billion in FPIs this year has been a significant driver of reserve accumulation. The inclusion of Indian debt into the J.P. Morgan Index further boosted inflows, increasing demand for Indian assets.
4. Economic Reforms and Policy Interventions: Since 2013, India has steadily increased its forex reserves through better macroeconomic management, stricter control on inflation, and maintaining a narrower fiscal and current account deficit. These measures have improved investor sentiment and attracted foreign investments, leading to a buildup of reserves over the years.

Impact of Forex Reserves on the Economy

The robust forex reserve position provides multiple benefits to the Indian economy:

• Economic Stability and Resilience: High forex reserves help stabilize the Indian rupee by allowing the RBI to intervene in the currency market when needed. This reduces currency volatility and builds investor confidence, mitigating the risk of sudden capital outflows.
• Enhanced Trade and Investment: A strong reserve position supports India’s creditworthiness on a global scale, making it an attractive destination for foreign investments. It also enables India to engage in international trade and transactions with greater confidence, fostering economic growth.
• Monetary Policy Flexibility: With substantial reserves at its disposal, the RBI has more flexibility in managing the money supply, controlling inflation, and implementing monetary policies to support growth and stability.

Strategic Importance and Future Outlook

India’s foreign exchange reserves are not just a buffer against economic uncertainties but also serve as a strategic asset. The reserves will empower the RBI to tackle external shocks such as fluctuations in global oil prices or geopolitical tensions, ensuring that the economy remains stable. According to experts, the reserves could increase to $745 billion by March 2026 if current trends continue.

The record-high reserves have come at a time when global economic conditions are volatile, marked by geopolitical tensions and inflationary pressures. Despite these challenges, India’s strong foreign exchange reserves position underscores its resilience and growing influence on the global economic stage.

India’s achievement of crossing $700 billion in foreign exchange reserves is a testament to the country’s economic strength and effective policy measures. With its reserves now the fourth largest in the world, India is poised to leverage this financial buffer to maintain economic stability, attract more investments, and strengthen its position in global trade. As the country looks ahead, maintaining and possibly increasing this reserve will be crucial to navigating future economic uncertainties and sustaining growth.

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