Why India’s Forex Reserves are going up rapidly and why it matters.

The news

India’s forex reserves hit $705 billion in October 2024, making it the fourth country to cross the $700 billion mark. In 2024 alone, India’s reserves have surged by nearly $87.6 billion.

Think of it as a country’s savings made up of foreign currencies and gold. It helps a country to pay for its imports and tackle economic shocks. Lately, it has been increasing rapidly, here’s why.

Three major reasons our forex reserves are increasing

1. Foreign Inflows
Many foreign companies and investors are investing money here, buying INR and selling foreign currency, which adds to our reserves.

2. Improved Fiscal Deficit
The gap between what the government spends and what it earns is narrowing, attracting higher foreign investments.

3. RBI Interventions
The RBI is also additionally buying foreign currency and selling INR to keep the Indian rupee stable, further increasing our reserves.

Recently, the U.S. central bank has cut interest rates. This decision encourages more people to borrow money, which increases the circulation of USD in the market. As a result, the value of USD may decrease compared to other currencies, including the INR.

This can lead to volatility in the INR exchange rate, making our exports less competitive in global markets. That’s where the RBI intervenes. It sells INR in large quantities and buys foreign currencies, helping to stabilize the INR while also boosting our forex reserves.

Back in 1991, our reserves had diminished to the point where India could barely finance two weeks’ worth of imports. But the current level of Forex Reserves is estimated to be enough to cover more than a year of our imports.

Apart from this, it also plays a crucial role in balancing the economy.

Why Forex Reserves Matter?

1. Economic Stability
High reserves act as a buffer during global uncertainties, helping stabilize the currency value and preventing sudden depreciation.

2. Emergency Fund
It is a safety net during times of crisis, like a sudden spike in crude oil prices or a pandemic, helping the country manage its import bills smoothly.

3. Creditworthiness
Higher reserves improve a country’s credibility, making it easier and cheaper to borrow from international markets.

To conclude

As India continues to strengthen its position in the global economy, these robust forex reserves will play a pivotal role in supporting sustainable growth and economic resilience.