India's Forex Reserves Surge Past $700 Billion Milestone

Record-Breaking Forex Reserves

• India's foreign exchange reserves crossed $700 billion for the first time, reaching $704.89 billion as of September 27, 2024.
• This marks a significant increase of $12.58 billion in a single week, the largest weekly gain since mid-July 2023.
• India joins China, Japan, and Switzerland as the only economies with forex reserves exceeding $700 billion.

Components of the reserves:

• • Foreign currency ass  ets (FCAs): $616.15 billion
  • Gold reserves: $65.796 billion (increased by $2.184 billion)
  • Special Drawing Rights (SDRs): $18.547 billion
  • IMF reserve position: $4.387 billion

Factors Contributing to the Surge

• Consistent economic growth and improved macroeconomic fundamentals since 2013.
• Stricter inflation control and narrower fiscal and current account deficits.
• Strong foreign inflows, reaching $30 billion in 2024, primarily in local debt markets.
• Inclusion of Indian debt in a key J.P. Morgan index, attracting more foreign investments.
• RBI's proactive dollar purchases and market interventions.
• Favorable valuation adjustments due to:
  • Declining U.S. Treasury yields
  • Weakening dollar
  • Rising gold prices

Implications and Future Outlook

• Enhanced economic stability and investor confidence.
• Increased ability to manage currency volatility and external shocks.
• Reserves now cover over a year of projected imports.
• RBI's interventions have made the rupee one of the least volatile emerging market currencies.
• Projections suggest reserves could reach $745 billion by March 2026.

Challenges ahead:

• • Managing potential impacts of global tensions, particularly in the Middle East.
  • Balancing monetary policy amid changing global economic conditions.
  • Monitoring food and fuel prices to control inflation.

Foreign Exchange Reserves Overview

• FX reserves are cash and other reserve assets held by a central bank or monetary authority.
• They are used to balance payments, influence currency foreign exchange rates, and maintain financial market confidence.
• Commonly held in reserve currencies like the US dollar and euro.
• Can include banknotes, bank deposits, government securities, bonds, treasury bills, gold reserves, special drawing rights, and IMF reserve positions.
• Central banks earn interest on government securities but may incur loss or profit from currency depreciation or appreciation.
• Reserve assets are classified in the capital account of the balance of payments and are not included in liabilities of the International Investment Position.