Forex reserves cross $600 billion, a 15-month high

India’s foreign exchange reserves crossed $600 billion for the first time since May 2022, hitting a 15-month high. It stood at $609 billion as of July 14, rising for the third consecutive week on the back of dollar inflows from foreign institutional investors.

Reserves rose by $12.74 billion from the preceding week, recording their biggest gain in four months, mainly due to an increase in US government bonds held by RBI and an appreciation of non-dollar currencies. RBI holds over two-thirds of its foreign currency assets in US dollars, with the remaining in euro, yen, pound and Chinese renminbi.

The reserves had first crossed the $600bn mark in June 2021 following record foreign direct investments in the country. The volatility in the forex market following the Ukraine invasion forced the central bank to sell dollars to stabilise the market. However, reserves took an even bigger hit because of successive sharp interest rate hikes in the US, which depreciated the value of the bonds held by RBI.

Foreign investors have bought a net $16 billion in Indian equities in the last three months, data from the National Securities Depository Limited showed, allowing the central bank to buy from the market and build on reserves.

The current level of reserves is enough to cover 11 months of imports, up from 9.3 months in December 2022 and 8.9 months in September 2022.

Although the government has been promoting international trade in the rupee, maintaining adequate reserves continues to be a strategic objective of RBI, given that most imports are dollar-denominated.

The rupee ended at 81.94 on Friday, up 0.1% for the week. “Since October 2022, RBI has been rebuilding its reserves, taking advantage of rupee’s recovery when it appreciates beyond 82 levels,” said Careedge Ratings in a report. Positive capital flows are currently supporting the rupee.

“Capital flows have sustained its positive momentum for the fifth straight month in July, with the equity segment accounting for most of the inflows. Low currency and bond volatility, positive real rates and improving growth prospects have supported overseas demand,” said Careratings.