India climbs to 4th spot as forex reserves post record weekly gain

Why in the News

India’s foreign exchange reserves have reached a record $785.71 billion, and the country has moved past Russia into fourth place globally. The stock rose by $44.9 billion in the week to 4 September, the largest weekly gain the Reserve Bank of India (RBI) has recorded. The gain came from a special forex drive the RBI opened in June. That drive offered banks a concessional currency swap on foreign currency deposits raised from non residents. It filled fast enough for the RBI to shut its main window a month ahead of the announced closing date. The rank and the record therefore rest on borrowed money, since a non resident deposit is a liability that falls due.

What is the RBI’s concessional swap scheme?

1. The deposit it targets: An FCNR(B) account, meaning Foreign Currency Non Resident (Bank), holds a non resident’s money in foreign currency and repays it in that same currency, so the depositor carries no rupee risk.
2. What the swap does: The bank hands the foreign currency to the RBI in exchange for rupees. It receives a commitment to reverse that exchange at a fixed rate on maturity, so it does not carry the exchange risk on the principal.
3. Why it is concessional: The swap was priced below the market cost of buying that cover, which is what made this route cheaper for banks than raising the same money abroad on their own credit.

How big is the jump, and where does it place India?

1. A record stock: Reserves stood at $785.71 billion on 4 September, up $44.9 billion from 28 August.
2. A record weekly gain: The previous largest weekly rise was $16.7 billion, in the week ended 27 August 2021, so this gain is over two and a half times that mark.
3. Fourth place came partly from a Russian decline: Russia’s international reserves fell $20.7 billion in the same week, from $774.2 billion to $753.5 billion, which put India ahead of it.
4. The three still above India: China holds $3.85 trillion, Japan $1.21 trillion and Switzerland $1.09 trillion.

What drove the gain?

1. One instrument accounts for it: FCNR(B) deposits under the concessional swap brought in $127.23 billion up to 31 August, an inflow the RBI had not anticipated at that scale.
2. The window shut early because of it: The scheme was set to close on 30 September. The pace of deposits led the RBI to close it a month sooner.
3. A deposit drive registers directly as reserves: Foreign currency handed to the RBI under the swap enters the reserve stock in the week it lands, which is why a mobilisation shows up as a single large weekly jump rather than a gradual build.

What did the full forex drive raise across its three windows?

1. When it ran: The RBI announced the drive on 5 June and it became operational on 8 June.
2. The Overseas Foreign Currency Borrowings window: The swap facility for Overseas Foreign Currency Borrowings (OFCBs), meaning foreign currency loans Indian banks raise abroad, drew $5.26 billion.
3. The External Commercial Borrowings window: The facility for External Commercial Borrowings (ECBs), meaning foreign currency debt raised abroad by Indian companies, drew $3.89 billion.
4. The combined total: All three windows together brought in $136.38 billion up to 31 August.
5. Two windows are still running: The OFCB and ECB swap windows stay open until 31 December, so the drive has not finished.

What does a larger reserve stock let the RBI do?

1. A sustained run of increases: Reserves have now risen for ten weeks in a row.
2. Ammunition for the rupee: A larger stock lets the RBI sell dollars to slow a fall in the rupee without drawing the cover down to an uncomfortable level.
3. Import cover is the standard test: Reserve adequacy is judged by the number of months of imports the stock can pay for, and a higher stock lengthens that cover.
4. It prices external borrowing: Lenders and rating agencies read reserve adequacy as a measure of a country’s capacity to meet external obligations, so the stock affects the terms on which Indian borrowers raise money abroad.

Challenges to building reserves through a concessional swap window

1. The addition is debt creating: A non resident deposit counts within India’s external debt, so the reserve stock and the liability against it rise together. Eg. Non resident deposits are among the largest single components reported in the Finance Ministry’s quarterly external debt statement.
   The Fix: Report the debt creating share of any reserve addition alongside the headline reserve number, so the two are read together.
2. Maturities bunch at one point: A window filled inside three months falls due inside three months, which turns a one off inflow into a one off outflow at redemption. Eg. The concessional FCNR(B) swap of 2013 raised about $34 billion and came up for redemption together in late 2016.
   The Fix: Vary the swap rate by tenor, so deposits spread across maturities instead of bunching at the cheapest one.
3. The subsidy sits on the central bank’s books: Pricing the swap below the market cost of cover means the RBI absorbs the difference on the exchange risk it has taken on. Eg. Cover on a three to five year rupee dollar exposure runs to roughly 3% a year, which is the order of the spread a concessional rate gives away.
   The Fix: Publish the cost of the swap subsidy as a stated line item, so the price of the reserve build is visible alongside the reserve total.
4. A ranking is not a buffer: The reserve table compares stock sizes across economies with very different import bills and external liabilities, so a place in it says nothing about adequacy. Eg. Switzerland holds reserves above a trillion dollars on an economy a fraction of India’s size.
   The Fix: Judge the stock against import cover and short term external debt rather than against other countries’ totals.
5. Reserve building substitutes for adjustment: Drawing in deposits to steady the currency postpones the correction a persistent current account gap eventually forces. Eg. The rupee continued to depreciate through the years after the 2013 deposit drive ended.
   The Fix: Tie each window to a stated reserve adequacy target, so it closes as a one time step rather than becoming a standing instrument.

Conclusion

India’s place in the reserve table now rests on money that has to be repaid rather than on export earnings or durable capital inflow. That distinction decides whether the buffer holds once the deposits mature. The two borrowing windows still open will show whether banks keep taking the concessional rate after the deposit window has closed. The number to watch is not the reserve total but the share of it carrying a matching external liability.

Back2Basics: What foreign exchange reserves are made of

1. Foreign currency assets: The largest component, held as deposits and securities denominated in currencies other than the rupee, and the part that moves most with valuation changes and market intervention.
2. Gold: Bullion held by the RBI and valued at market prices, which is why the reserve total moves when the gold price moves.
3. Special Drawing Rights: An international reserve asset created by the International Monetary Fund (IMF) and allocated to members in proportion to quota, exchangeable with other members for usable currency.
4. Reserve tranche position: India’s own paid in quota holding at the IMF, which it can draw on without policy conditions attached.

Matching Previous Year Question

“[2013] Which one of the following groups of items is included in India’s foreign-exchange reserves? (a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries (b) Foreign-currency assets, gold holdings of the RBI and SDRs (c) Foreign-currency assets, loans from the World Bank and SDRs (d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank ANSWER: (b)”