India’s Forex Reserves Rise for Second Straight Week to $676.24 Billion; What’s Driving the Recovery?

India’s forex exchange reserves have edged up for the second week running as the rupee attempts to revive after months of continuous weakening induced by geopolitical turmoil and the Reserve Bank of India’s sustained attempts to arrest the decline in its value. According to data from the RBI on Friday, India’s forex reserves rose by $1.08 billion to $676.24 billion for the week ending July 17. The reserves have steadily risen week-on-week since last week’s upward revision of $964 million.

Earlier this year, the Reserve Bank’s Weekly Statistical Supplement reported declining foreign exchange reserves for several weeks, as they were under threat from global uncertainty. The latest increase comes after a fall in reserves from a record high of $728.49 billion in the week to February 27, when the central bank sold dollars to protect the rupee against heightened volatility due to tensions in West Asia.

Foreign Currency Assets Top the Gains

The largest contributor to the rise for the week was foreign currency assets (FCAs), which make up the biggest component of India’s forex reserves. FCAs increased by $4.55 billion to $551.06 billion during the reporting week.

In US dollar terms, FCAs also reflect movements in the value of major non-dollar currencies such as the euro, pound sterling and Japanese yen held as part of the reserves, the RBI said.

Gold Reserves Plunge

In contrast, India’s gold reserves moved in the reverse direction as foreign currency assets strengthened. Gold holdings declined by $3.48 billion to $101.75 billion on the week.

Special Drawing Rights (SDRs) with the International Monetary Fund (IMF), meanwhile, rose by $44 million to $18.67 billion. India’s reserve position with the IMF, however, fell by $32 million to $4.76 billion.

Recovery From Previous Pressure

Earlier this year, the RBI sold dollars to curb excessive volatility in the rupee after geopolitical tensions in West Asia put pressure on India’s forex reserves. The central bank has said repeatedly that it intervenes in the foreign exchange market only to promote orderly market conditions and not to target any particular exchange rate.

The latest data suggests reserves are slowly rebuilding from those interventions, marking the second week in a row of gains.

The Importance of Forex Reserves

Foreign exchange reserves serve as a financial buffer for the economy. They not only fulfil India’s requirements for imports and external payments, providing stability to the rupee amid global market volatility, but also offer a hedge against possible global economic or even geopolitical shocks. Reserves are comprised of foreign currency assets, gold reserves, Special Drawing Rights (SDR) and the country’s reserve position with the IMF.

A comfortable forex reserve position is usually considered a sign of macroeconomic stability, giving the RBI more room to deal with currency volatility and helping the country to sail through phases of global uncertainty.

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