India’s foreign exchange reserves have risen for eight straight weeks as RBI measures pull in overseas dollars, led by a sharp increase in NRI deposits
India’s foreign exchange reserves climbed to a record $729.33 billion, adding roughly $63 billion in just eight weeks as a sustained wave of dollar inflows strengthens the country’s external buffer.
Data released by the Reserve Bank of India on Friday showed reserves rose $12.4 billion in the week ended August 21, extending the run of weekly gains to eight. The latest increase also pushed the reserve pile above the previous peak reached in February.
The sharp build-up comes as the RBI’s measures to attract foreign currency begin to show their full impact. In June, the central bank rolled out a series of incentives aimed at bringing more dollars into the banking system and supporting India’s balance of payments.
These included discounted hedging facilities for overseas borrowings by state-run companies and banks, along with a free-of-cost hedging facility for banks seeking to raise foreign exchange deposits overseas.
The RBI received nearly $73 billion through these schemes between June 5 and August 21, with about $65 billion coming from deposits by non-resident Indians.
The surge in deposits was strong enough for the central bank to advance the closure of its deposit hedging facility by a month to the end of August.
More from BusinessForeign currency assets lead rise
The latest increase in reserves was led by foreign currency assets, which rose $9.5 billion during the week to $591.33 billion from $581.85 billion.
Gold holdings provided another major boost. Their value increased by $2.8 billion to $114.22 billion from $111.42 billion a week earlier.
India’s holdings of Special Drawing Rights with the International Monetary Fund rose to $18.85 billion, while its reserve tranche position in the IMF increased to $4.93 billion.
The composition of the increase also points to the role of both actual dollar purchases and valuation gains.
Bigger buffer for the rupee
For India, the record reserve level comes at an important juncture. A larger foreign exchange stock gives the RBI more firepower to smooth sharp movements in the rupee and cushion the economy against external shocks.
The central bank has been a frequent participant in the foreign exchange market, particularly when the rupee has faced pressure from a stronger dollar, global capital outflows or higher import costs.
Those interventions have also meant that some of the additional dollars flowing into the country have been absorbed by the RBI rather than translating fully into a stronger rupee.
The build-up in reserves is therefore not simply a story of rising foreign capital. It also reflects the central bank’s strategy of accumulating foreign currency when inflows are strong, giving it greater room to intervene when conditions reverse.
What happens after the special window closes
The immediate question is whether the pace of reserve accumulation can continue once the RBI’s special deposit-related measures wind down.
The latest data suggest the schemes have been highly effective in attracting foreign currency, with NRI deposits accounting for the bulk of the inflows recorded under them. But some of the recent surge could prove temporary if banks and depositors brought funds forward to take advantage of the facility before its closure.
Even so, India enters the next phase with a substantially stronger external position. At $729.33 billion, the country’s forex reserves provide a sizeable buffer against currency volatility and global financial shocks.
The record also marks a sharp turnaround from periods earlier this year when India’s reserves had come under pressure from foreign exchange intervention and weaker capital flows.
(With inputs from agencies.)
