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What flipped the decline of India’s FOREX reserves?


From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: Read the attached story


Central Idea

  • India’s forex reserves were at $578.4 billion as of March 2023—a fall of over $28 billion since March 2022, $19.7 billion of which was due to valuation changes, as per RBI.
  • The depreciation of the US dollar and increased capital flows contributed to a surge in reserves this year.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  1. Foreign Currency Assets (FCAs)
  2. Special Drawing Rights (SDRs)
  3. Gold Reserves
  4. Reserve position with the International Monetary Fund (IMF)

Current Scenario: Impact of US Rate Hikes and Capital Inflows

  • US Rate Hikes and Capital Flows: The US Federal Reserve’s rate hikes have triggered a flow of foreign investments into the US treasury, leading to capital outflows from India.
  • Potential Capital Inflows: So far this year, the US Fed has raised rates by 75 basis points. This could potentially increase capital inflows into emerging markets like India.
  • Improved Balance of Payment (BoP): India’s Balance of Payment has improved significantly, with the current account deficit projected to be less than 2% of GDP.
  • Resumption of Equity Capital Flows: There is a resumption in equity capital flows, and India continues to attract substantial investments compared to other emerging market peers.

Global Standing of India’s Forex Reserves

  • Rank among Nations: India ranks fourth among countries with the highest forex reserves, following China, Japan, and Switzerland.
  • Differences in Reserve Accumulation: Most countries maintain large and persistent current account surpluses, owing to a competitive exports market. However, India, Brazil, and the US have accumulated reserves primarily through capital flows rather than a significant current account surplus.

RBI’s Strategy for Diversifying Forex Reserves

  • Internationalizing the Rupee: The RBI aims to reduce reliance on foreign currencies by internationalizing the Indian rupee.
  • Exploring Use of Asian Clearing Union Currencies: The RBI is exploring the use of currencies from member states of the Asian Clearing Union, including the rupee, for payment and settlement among themselves.
  • Agreement with Sri Lanka: An agreement with the Central Bank of Sri Lanka enables the use of the rupee as a designated foreign currency, promoting trade between the two countries and facilitating rupee transactions for Indian tourists in Sri Lanka.


  • While India’s forex reserves have seen fluctuations due to various factors, the country’s sustained efforts to diversify and strengthen its reserves position indicate a proactive approach by the RBI.
  • The ongoing focus on attracting foreign investments, coupled with measures to internationalize the rupee, may contribute to a more stable and resilient forex reserve management system in the future.

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