The foreign exchange reserves of India have reached an all-time high of $534.568 billion, with an increase of over $11.9 billion in the week ended July 31, 2020, according to the Reserve Bank of India (RBI) data.
The RBI data considered factors like investments made by foreign investors into Indian equities, gains on non-dollar foreign exchange holdings, revaluation of gold reserves and one-off cash inflows from corporate fundraising, all of which contributed to this massive surge.
Excited with the performance of foreign exchange reserves, RBI Governor Shaktikanta Das said that the surge is equivalent to 13.4 months of imports.
The data also indicated a significant increase of $10.347 billion to $490.829 billion in India’s foreign currency assets (FCAs) in the reporting week.
Though FCAs are mostly held in US dollars, they do get affected by appreciation or depreciation of other currencies held in the foreign exchange reserves like the euro, the Japanese yen, and the British pound.
Furthermore, India’s special drawing rights with the International Monetary Fund (IMF) saw an increase of $12 million to $1.475 billion. In comparison, its foreign exchange reserves with the IMF rose by $54 million to $4.639 billion during the week of July 31.
According to Madhavi Arora, the lead economist for foreign exchange and rates at Edelweiss Securities, the surge is fueled by the revaluation of FCAs and Gold.
By carefully looking at the data, a depreciation of over 1% in the dollar index can be observed in the reporting week, driven by a decline in the U.S. bond yields. However, this depreciation encouraged the holding of foreign exchange reserves in other currencies and gold.
RBI’s constant efforts to capitalize on the dollar inflows and keep the Indian rupee from appreciating has brought liquidity in the domestic market, which added to the foreign exchange reserves buffer as well.
India’s foreign exchange reserves serve as a monetary policy tool for the RBI to regulate the rupee. They are comprised of external assets such as gold, special drawing rights with the IMF and FCAs. Also, the country heavily relies on cash inflows to capital markets, foreign direct investments, and external commercial loans to deal with any economic crisis.