With this steady climb, India’s reserves are now just $19 billion short of the all-time high of $704.89 billion recorded in late September 2021.
What’s Driving the Reserves Growth?
The uptick in forex reserves is driven by a combination of factors, including the RBI’s interventions in the currency markets and valuation changes stemming from movements in the U.S. dollar and other global currencies.
Foreign currency assets, a key component of reserves, tend to fluctuate with changes in exchange rates of the currencies in which those assets are held. When the U.S. dollar weakens, for instance, the value of non-dollar holdings—like the euro, pound, and yen—appreciates, contributing to a higher overall reserves tally.
Rupee Sees Brief Boost Amid Foreign Inflows
During the week in focus, the Indian rupee gained around 0.8%, marking its strongest weekly performance since mid-March. This improvement came amid renewed foreign portfolio inflows into Indian equities, as investor confidence picked up.
Global market conditions also played a role. The U.S. dollar softened amid mounting concerns about tariff policy and its potential drag on the American economy, further aiding the rupee’s short-term strength.
However, despite the initial momentum, the rupee eventually closed at 85.45 per dollar, registering a slight 0.1% weekly decline, as geopolitical tensions between India and Pakistan escalated following a militant attack in Jammu & Kashmir.
Beyond Currency Assets: What Else Is Included?
India’s forex reserves are made up of more than just foreign currency assets. They also include gold reserves, Special Drawing Rights (SDRs) from the International Monetary Fund (IMF), and India’s Reserve Tranche Position (RTP) at the IMF.
These components provide the country with a diversified cushion of financial instruments, which can be tapped during periods of external volatility or to manage exchange rate stability.
Outlook
India’s steadily growing reserves are a reassuring sign of macroeconomic stability and provide the central bank with increased firepower to manage currency volatility. With global uncertainty still lingering and foreign inflows showing signs of recovery, the reserves could edge even closer to—or surpass—the previous record in the coming weeks.
That said, risks from regional tensions and external shocks could weigh on the rupee and capital flows, and will be closely watched by markets and policymakers alike.