India’s Forex Reserves Hit Record $729.3 Billion After RBI Steps to Attract Capital

India’s Forex Reserves: India’s foreign exchange reserves rose by $12.4 billion to a record $729.3 billion in the week ended August 21, according to data released by the Reserve Bank of India (RBI) on Friday. The latest level surpassed the previous record of $728.5 billion recorded in February.

What drove the rise in forex reserves?

The increase came after measures taken by the RBI in early June to attract foreign currency inflows, including a special deposit programme for overseas residents.

These measures generated $72.8 billion of inflows through August 21. Since the measures came into effect on June 8, India’s forex reserves have risen by $47.7 billion.

The stronger inflows have helped strengthen India’s external position and prevent what could have been an unprecedented third consecutive year of a deficit in the country’s broadest measure of money flowing in and out of the economy.

How have the reserves changed?

Foreign currency assets increased by $9.4 billion to $591.3 billion in the week ended August 21, while gold reserves rose by $2.8 billion to $114.2 billion.

The rise in reserves also gives the RBI greater firepower to manage pressure on the rupee. The currency has recovered around 1.5% from its record low in May but remains vulnerable to elevated oil prices because of India’s dependence on fuel imports. 

READ THIS ALSO: Jio Platforms IPO: SEBI Clears ₹37,000 Crore Issue, Set to Become India’s Largest-Ever IPO

What is the cost of attracting foreign capital?

While higher reserves provide a cushion for India’s external position, attracting the inflows comes at a cost. The RBI is bearing banks’ hedging costs under the diaspora deposit programme, allowing lenders to offer attractive interest rates to overseas customers.

The cost is also higher than in 2013, when the RBI last turned to overseas residents for such deposits, because US interest rates are now at significantly higher levels.

The RBI earlier brought forward the closure of the diaspora deposit programme after inflows proved stronger than expected.

Final Words

India’s forex reserves have reached a record $729.3 billion, providing the RBI with a stronger buffer against external shocks and greater capacity to manage rupee volatility. The sharp increase has been supported by measures to attract overseas capital, although the cost and sustainability of building reserves through such inflows remain important factors to watch.