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India has achieved a significant milestone in its economic journey, with its foreign exchange reserves crossing the $700 billion mark for the first time. This remarkable achievement places India among the top four economies globally in terms of foreign reserves, joining the ranks of China, Japan, and Switzerland. The reserves witnessed a substantial increase of $12.6 billion during the week ending September 27, marking the largest weekly addition since July 14, 2023.
Several factors have contributed to this surge in India's forex reserves. Stable oil prices have played a crucial role, as India is a significant importer of crude oil. Additionally, inflows into India's stock and bond markets have further boosted the reserves. These inflows are driven by investor confidence in the Indian economy, particularly as the country continues on a path of strong economic growth.
Analysts at BofA Securities are optimistic about the future trajectory of India's forex reserves. They project that the reserves could reach $745 billion by March 2026, citing the country's comfortable balance of payments surplus, estimated at around $40-50 billion annually. This surplus reflects India's strong economic fundamentals and its ability to attract foreign capital.
The Reserve Bank of India (RBI), the country's central bank, appears to be comfortable with the growing forex reserves. The RBI's strategy is to build up buffers against potential external risks, underscoring a cautious and proactive approach to managing the country's economic vulnerabilities. This approach has been evident in the RBI's interventions in the foreign exchange market to mitigate volatility in the rupee.
Looking back, the growth of India's forex reserves has been impressive, particularly under the current RBI governor, Shaktikanta Das. Under his leadership, India's reserves have swelled by $4.2 billion a month on average over an extended period of 70 months, accumulating a total of $298 billion since he took charge. This growth rate surpasses the previous record set by former governor Y.V. Reddy.
Despite the remarkable growth, India's forex reserves did experience a dip in 2021, dropping from a peak of $642 billion in September to $525 billion within a year. This decline was primarily attributed to revaluation losses. However, the underlying strength of the reserves remains rooted in the balance of payments surplus, which is a key driver of their growth.
While India's forex reserves are considered strong compared to other major emerging markets, they are not necessarily viewed as excessive. The RBI's intervention in the foreign exchange market is crucial for managing currency volatility, and the central bank often buys and sells currency to mitigate fluctuations in the rupee. However, larger forex reserves do not necessarily translate into a stronger rupee. Despite the record forex reserves, the rupee ended Friday's session near a record low of 83.98 against the US dollar.
Source: India becomes fourth nation to reach $700 billion in forex reserves