Foreign Exchange Reserves in India: Components, RBI’s Role
Gajendra Singh Godara
Oct 6, 2025
10
mins read
Foreign exchange reserves (or forex reserves) are the stockpile of foreign assets held by a country’s central bank to back its currency and external obligations. In India’s context, these include foreign currency assets (FCAs), gold, Special Drawing Rights (SDRs) and the IMF reserve position. The Reserve Bank of India (RBI) manages these assets to ensure exchange rate stability and smooth balance of payments operations. For UPSC aspirants, understanding forex reserves is important in sections on the external sector, macroeconomics and RBI policy, as it influences trade balance, currency stability, and India’s economic security.
India’s foreign exchange reserves fell by $2.3 billion to $700.23 billion in the week ended September 26, latest data from the Reserve Bank of India (RBI) shows.
RBI’s data shows that foreign currency assets, a major component of the reserves, decreased by $4.393 billion to $581.757 billion.
Definition: Foreign exchange reserves are assets (mostly held in USD and other major currencies) that a central bank holds to back its domestic currency. They provide a buffer for international transactions and crises.
Components: In India these comprise:
Foreign Currency Assets: Largest share (e.g. US Treasury bonds, other currencies). Example: RBI data (Aug 15, 2025) shows FCAs around $585.903 billion.
Gold Reserves: Physical gold bullion. RBI held 879.59 tonnes as of Mar 2025 (valued ~$78.17 billion). Gold provides diversification.
SDRs: Special Drawing Rights (IMF reserve asset based on a basket of currencies). India’s SDR holding was $18.782 billion (Aug 2025).
IMF Reserve Tranche: India’s reserve position in the IMF (about $4.754 billion as of Aug 2025).
Regulatory Basis: The RBI Act (1934) empowers the RBI to manage these reserves towards macroeconomic objectives.
RBI’s Role in Forex Stability
Market Intervention: RBI actively uses reserves to stabilise the rupee. For instance, when the rupee falls, the RBI can sell USD (exchange reserves) to arrest depreciation.
Liquidity Management: In FY2024-25 RBI raised the ceiling on FCNR(B) deposits by 150 basis points and mobilised special schemes (e.g. Masala Bonds, swap lines) to attract foreign capital. These measures help augment foreign currency inflows and strengthen reserves.
FCNR(B) deposits are Foreign Currency Non‑Resident (Bank) term deposits that Non‑Resident Indians hold in India in freely convertible foreign currencies, typically for 1–5 years.
Diversification: RBI has been increasing its gold holdings (adding 57.49t in FY25) and maintains foreign currency swap lines as alternative liquidity sources.
Balance of Trade: Reserves finance imports and external debt. At ~$700 billion, India’s reserves cover about 11–11.9 months of imports, far above the traditional 6-month norm. This buffer helps absorb import shocks (e.g. oil price spikes).
Currency/ Rupee Stability: Ample reserves allow RBI to intervene during volatile flows. For example, in Dec 2024 RBI sold $69.05 billion to support the rupee. Such actions can check rapid depreciation.
External Vulnerability: High reserves “limit external vulnerability” by ensuring liquidity during crises. They enable the country to meet foreign debt repayments and FX obligations even under stress.
Investor Confidence: Large reserves signal economic strength. These foreign reserves “reassure investors” that external obligations can be met.
Credit Ratings: International agencies often factor reserves into sovereign risk. Adequate reserves can help maintain healthy credit ratings (by showing external buffers).
Global Comparison
World Rankings: India’s forex reserves ($0.69 T) rank roughly 5th globally. China’s reserves are by far the largest ($3.45 T), followed by Japan ($1.30 T), Switzerland ($0.86 T), and the US (~$0.77 T). India slightly surpasses Saudi Arabia and Russia.
Reserves-to-GDP: India’s reserves (~15-16% of GDP) are lower than China’s (~30%) or Japan’s (~47%), reflecting differences in trade patterns and capital flows. However, India’s reserve cover (months of imports, debt ratio) is considered robust for its level of development.
Risks to Forex Reserves
Capital Flow Volatility: Sudden reversals (e.g. FII outflows on global cues) can force Reserve Bank of India to sell dollars, depleting reserves. Emerging market shocks (e.g. rising US rates, Fed tightening) pose continual risk.
Commodity Shocks: India’s heavy reliance on oil means a sharp oil price spike raises import costs, draining FX reserves rapidly. For example, oil import bill volatility is a perennial drain on reserves.
Global Trade Uncertainties: Trade wars or tariffs (as noted by RBI’s bulletin) create headwinds. RBI warns that new high tariffs could hit growth, implying possible pressure on reserves if exports slow.
Valuation Effects: A rising dollar can reduce the dollar value of non-USD assets (like Euro or Gold reserves), causing valuation losses even if quantity remains constant.
Opportunity Cost: Holding large reserves incurs costs (low returns). Though not an immediate risk to levels, it is a fiscal consideration (reserves yield < domestic debt rate).
Forex Market Intervention: RBI’s primary tool is active intervention (spot and forward market) to smooth the rupee. It adopts “lean against the wind” operations, buying or selling as needed.
Interest Rate Incentives: RBI increased FCNR(B) deposit rates to attract non-resident deposits. Such incentives help shore up FCAs.
Swap Lines: India maintains bilateral FX swaps – e.g. a $75 billion rupee-yen swap with Japan (renewed Feb 2025) – to ensure additional liquidity if needed.
Gold Purchases and Repatriation: RBI has been buying gold (73 t in 2024) and repatriating bullion to India. This diversifies reserves and increases gold’s share (~11.7% of reserves as of Mar 2025).
Macroprudential Policies: RBI and government coordinate (capital flow management tools, strategic use of import duties) to smooth outflows. For example, reducing gold import duties can manage outflows, while promoting FDI/FPI bolsters inflows.
IMF and Multilateral Actions: India relies on IMF’s Flexible Credit Line and maintains a moderate external debt/ GDP ratio, easing pressure on reserves. (IMF suggests keeping 3 months of imports covered; India far exceeds this metric).
Liquidity Sterilisation: Liquidity sterilisation means the central bank neutralises the rupee‑liquidity impact of its foreign exchange interventions so money supply and short‑term rates stay aligned with monetary policy. In practice, it offsets rupees injected when buying dollars (or rupees drained when selling dollars) using tools like Open Market Operations (selling/buying government securities), the Liquidity Adjustment Facility (repo/reverse repo), the Market Stabilisation Scheme bonds, changes in the Cash Reserve Ratio, and FX forwards/swaps to time the liquidity impact.
Keep reserve adequacy strong: Target import cover near 10–12 months and monitor short‑term external debt (residual maturity) to limit rollover risk and bolster crisis buffers.
Diversify and optimize the mix: Balance foreign currency assets with calibrated gold and SDR holdings; manage duration and currency composition to stabilise returns and valuation under volatility.
Deepen stable inflows: Strengthen long‑term FDI and services exports, use calibrated NRI deposit incentives (e.g., FCNR(B)/NRE when needed), and improve policy certainty to attract quality capital.
Smart intervention with sterilisation: Continue “lean‑against‑the‑wind” FX operations while neutralising liquidity via OMOs, LAF (repo/reverse repo), MSS, CRR changes, and FX swaps to keep money markets stable.
Build precautionary backstops: Maintain/expand bilateral and multilateral swap lines and promote local‑currency trade settlement to reduce hard‑currency stress during global shocks.
UPSC Previous Year Questions
Prelims
Q1. Which of the following has/have occurred in India after its liberalization of economic policies in 1991? (2017)
Share of agriculture in GDP increased enormously.
Share of India’s exports in world trade increased.
FDI inflows increased.
India’s foreign exchange reserves increased enormously.
Select the correct answer using the codes given below:
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Ans: (b)
Q2. With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? (2014)
Balance of trade
Foreign assets
Balance of invisibles
Special Drawing Rights
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4
Ans: (c)
Frequently Asked Questions (FAQs)
Q.What are foreign exchange reserves (definition)?
A. Forex reserves are foreign assets (currencies, gold, SDRs, etc.) held by a central bank.
Q. Who manages India's forex reserves?
A. The Reserve Bank of India (RBI) manages India's entire stock of forex reserves
Q. What are RBI reserves used for?
A. RBI’s reserves or India’s forex reserves are used to stabilise the rupee and finance external obligations.
Q. How much are India’s forex reserves today?
A. As of September 2025 India’s foreign exchange reserves stood at $700.23 billion.
Q. What is included in India's forex reserves?
A. They include foreign currency assets, gold, Special Drawing Rights (SDRs), and the IMF Reserve Tranche Position.
Q. Why are forex reserves important for India?
A. They cover imports and debt repayments (RBI notes ~$700 billion covers ~95% of external debt) and underpin confidence in the economy.
Conclusion
India’s substantial forex reserves are a key pillar of economic resilience. They enable the RBI to manage currency volatility and meet external payments, while giving global markets confidence in India’s economy. In concrete terms, the RBI notes that ~$700 billion covers about 95% of India’s foreign debt and roughly 11 months of imports. Understanding forex reserves thus bolsters preparation on external sector topics and current affairs in the UPSC syllabus.
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