India’s Forex Reserves Top $700 bn, India becomes 4th country to cross this mark

India’s forex reserves exceeded $700 billion for the first time, reaching $704.89 billion, following a seven-week climb.

India’s Forex Reserves Surge by $87.6 Billion in 2024, Crossing $700 Billion Mark

India’s forex reserves have surged by $87.6 billion in 2024, surpassing last year’s total increase of nearly $62 billion.

• In the week ending September 27, the reserves increased by $12.6 billion, marking the largest weekly rise since mid-July 2023.
• India is now the fourth-largest economy globally to have forex reserves exceeding $700 billion, following China, Japan, and Switzerland.

Factors which led to rise in India’s Forex Reserves

• Investment Boost: Since 2013, India has strengthened its forex reserves through improved macroeconomic conditions, attracting foreign investments.
• Foreign Inflows: In 2024, foreign inflows have reached $30 billion, primarily driven by local debt investments included in a J.P. Morgan index. RBI Interventions: The recent increase was partly due to $4.8 billion in dollar purchases by the RBI and $7.8 billion from valuation gains linked to the U.S. Treasury yields, the dollar’s strength, and rising gold prices.
• Market Stability: Adequate forex reserves help reduce currency volatility, providing the Reserve Bank of India (RBI) with the capability to intervene if necessary.
• Controlled Volatility: The RBI has managed the rupee’s volatility, keeping it stable among emerging market currencies.

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About Foreign Exchange Reserves

• Foreign Exchange Reserve are assets denominated in a foreign currency that are held on reserve by a central bank. 
• Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
• Composition of Forex of India (in descending order)
  • Foreign Currency Assets
  • Gold Reserves
  • Special Drawing Rights (SDR)
  • Reserve Position in IMF 

Significance of foreign currency reserves

• Economic Crisis Liquidity: In crises, central banks can exchange foreign currency for local currency, ensuring companies remain competitive in imports and exports.
• Currency Depreciation: Japan, using a floating exchange rate, purchases US treasuries to keep the yen lower than the dollar, enhancing export competitiveness.
• International Finance Obligation: Forex reserves help meet international financial commitments, such as paying debts and financing imports.
• Internal Project Funding: Foreign currency reserves can be utilized to finance domestic infrastructure and industry projects.
• Reassurance to Investors: Holding forex reserves can instill confidence in foreign investors during times of unrest or uncertainty.
• Portfolio Diversification: Central banks diversify their reserves by holding various currencies and assets, mitigating risk from declining investments.