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India’s central bank, the Reserve Bank of India (RBI), is set to further bolster its foreign exchange (forex) reserves, aiming to enhance the country’s economic resilience. According to sources familiar with the RBI’s plans, the bank intends to capitalize on robust inflows into India’s equity and debt markets to expand its forex reserves.
The RBI’s efforts to absorb dollar inflows are strategically aimed at preventing a significant appreciation of the Indian rupee, despite the nation’s strong economic growth and favorable balance of payments. Analysts suggest that the accumulation of forex reserves will serve as a vital buffer against global currency fluctuations, thereby safeguarding India’s economic stability.
As of March 15, the RBI’s FX reserves surged to a record high of $642.49 billion, underscoring its commitment to strengthening the country’s financial defenses. A senior source familiar with the RBI’s strategy emphasized that while reserves are currently deemed adequate based on internal assessments, the central bank remains committed to further enhancing its reserves.
RBI Governor Shaktikanta Das highlighted the importance of bolstering reserves in January, emphasizing their role in shielding emerging market economies from external shocks. With substantial inflows observed in both equity and debt markets, the pace of reserve accumulation has accelerated in recent months. The inclusion of Indian debt in prominent emerging market debt indexes later this year is expected to sustain these inflows.
B. Prasanna, head of treasury at ICICI Bank, affirmed the adequacy of India’s forex reserves, citing the country’s robust import cover and ability to meet short-term debt obligations. Despite the resilience of India’s reserves, Prasanna noted that the RBI will opportunistically augment its reserves to capitalize on favorable market conditions.
Analysts anticipate that the ongoing reserve-building efforts will act as a check on sharp appreciation of the rupee. Barclays Investment Bank projects India’s FX reserves to surpass $700 billion by the end of 2025, reflecting the nation’s commitment to fortifying its financial defenses.
Despite foreign investors’ significant inflows into Indian equities and bonds in 2023, the rupee’s volatility remained subdued, primarily due to the RBI’s intervention in currency markets. Over the same period, the RBI augmented its reserves by $18.1 billion, underscoring its proactive approach to managing currency fluctuations.
Looking ahead, as India’s economy expands and its markets grow, ICICI’s Prasanna emphasized the need for forex reserves to keep pace with economic growth. With India’s economy projected to reach $5 trillion by FY27 and $7 trillion by the end of the decade, the continuous accumulation of reserves will be crucial to ensuring financial stability and resilience.
