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India’s foreign exchange reserves (forex) crossed the $700 billion milestone for the first time on record, extending its winning streak to seven straight weeks. India is now only the fourth economy in the world to cross $700 billion in forex reserves after China, Japan, and Switzerland. The forex kitty jumped by $12.588 billion to hit a fresh lifetime high of $704.885 billion for the week ended September 27 in their biggest weekly increase since mid-July 2023, driven by valuation gains and dollar purchases made via the Reserve Bank of India. In the week corresponding to the latest reserves data, the Indian rupee strengthened past 83.50 to the dollar, likely spurring the RBI to shore up its reserves.
This buffer of foreign exchange reserves helps insulate domestic economic activity from global shocks. This has come a long way from 1990-91 foreign exchange crisis when the then Indian government had to pledge a part of its gold reserves to Bank of England to secure just a $405 million loan. It was a national shame but the then government was left with no choice except taking the extreme step. This was an outcome of the decades of misrule of successive corrupt Congress governments which left the country in tatters. It was only early this year only when Modi government brought the part of this pledged gold reserve back to country. Today under Modi government, India’s gold reserves have also swelled to a respectable level, robust enough to give the economy a solid foundation.
Foreign inflows hit $30 billion so far this year, led mainly by investments in local debt after they were included in a key JP Morgan index. RBI Governor has repeatedly stressed the need to build a forex buffer to protect against the current market volatility. From the time when India used to boast about a world-renowned economist Finance Minister in the name of Manmohan Singh, the country was struggling to keep inflation under check or even to keep its borders safe, to the economic management of a Chaiwala Prime Minister, should be a tight slap on the face of Modi detractors. What this government has done on the economic front apart from completely transforming the basic work culture of the governance has astonished the entire world.
Overseas inflows into the nation’s stocks and bonds have helped the RBI boost its stockpile to $705 billion, the fourth highest in the world. This amount provides stability to the rupee against external shocks, with the RBI using its reserves to limit extreme swings in the currency, which is hovering near a record low. From the “fragile five” category in 2013 when foreign investors exited because of weak macroeconomic fundamentals India has reached to become world’s fifth largest economy and knocking doors to become fourth largest economy of the world soon. Since then, an effective check of the inflationary spiral, accelerated economic growth, squeezing of fiscal and current account deficits, and abiding faith in the India growth story have led to a surge of foreign funds.
Forex reserves are assets held by a nation’s central bank or monetary authority. They are generally held in reserve currencies, typically the US dollar and, to a lesser extent, the Euro, Japanese Yen, and Pound Sterling. The RBI closely monitors the forex markets and intervenes to maintain orderly market conditions and keep the rupee in a narrow trading range, making it the least volatile emerging market currency. The RBI intervenes through liquidity management, including the sale of dollars, to prevent a steep rupee depreciation. A decade ago, the Indian Rupee was one of the most volatile currencies in Asia. However, it has since become one of the most stable. A less volatile rupee makes Indian assets more attractive to investors, who can expect better performance with more predictability.
India’s feat is nothing short of a miracle in today’s world scenario when the major world economies are struggling with out-of-control inflation, ballooning unemployment and declining economic growth rate. This can only happen when we have an honest leadership at the top and we Indians can be proud of the fact that after many decades India has an honest top leadership. -Yugal Parashar