NEW DELHI: India’s foreign exchange reserves rose to a fresh record of $740.80 billion in the week ended August 28, according to data released by the Reserve Bank of India (RBI). The latest increase marks the ninth consecutive week of growth in the country’s foreign exchange reserves.

India’s reserves increased by about $11.47 billion from the previous week’s $729.33 billion. Over the past nine weeks, the country’s foreign exchange reserves have risen by nearly $75 billion, reflecting strong foreign-currency inflows.

Dollar inflows drive the rise

The sharp increase has been supported largely by special measures introduced by the RBI and the government in June to attract foreign-currency inflows.

These measures included discounted hedging facilities for overseas borrowings by state-run companies and banks, as well as a free-of-cost hedging facility that encouraged banks to raise foreign-currency deposits from overseas sources.

The schemes attracted more than $136 billion between June 5 and August 31. Of this amount, approximately $127 billion came through deposits from non-resident Indians (NRIs).

The scale of the inflows was much higher than initially expected, strengthening India's external financial position and giving the RBI a larger pool of foreign currency that can be used to manage volatility in the rupee.

Foreign currency assets remain the largest component

The country's foreign exchange reserves consist of foreign currency assets, gold, Special Drawing Rights (SDRs) and India's reserve position with the International Monetary Fund (IMF).

As of August 28, the composition was:

• Foreign currency assets: $600.67 billion

• Gold reserves: $116.41 billion

• Special Drawing Rights: $18.81 billion

• IMF reserve tranche position: $4.91 billion

Together, these components took India's total reserves to $740.80 billion.

Support for the rupee

The record reserve level provides the RBI with greater capacity to intervene in the foreign-exchange market when necessary. A larger reserve buffer can help the central bank smooth sharp movements in the rupee and ensure that foreign-currency liquidity remains available during periods of market stress.

The rupee gained around 0.3% against the US dollar during the week to close at about ₹95.38 per dollar, according to the Reuters report.

The latest development comes at a time when the rupee has faced pressure from global economic uncertainty and higher energy prices. Strong reserves therefore provide an additional cushion for the Indian economy.

RBI faces a new liquidity challenge

While the inflows have strengthened India's external position, they have also created a challenge for the domestic banking system. The large dollar deposits have contributed to a significant surplus of rupee liquidity in banks.

The RBI is considering various tools to absorb excess liquidity and prevent it from creating unwanted inflationary pressure. Possible measures include longer-term variable-rate reverse repo operations, foreign-exchange swaps and other liquidity-management operations.

What the record means for India

The record level of foreign exchange reserves is considered a positive development because reserves act as a financial cushion against external shocks. They can help India meet international payment obligations, support confidence in the economy and give the central bank greater flexibility during periods of currency volatility.

However, the rise in reserves should also be viewed in context. A significant part of the recent increase has come from special foreign-currency deposit and borrowing arrangements, meaning that the surge does not necessarily represent a permanent improvement in India's underlying external position.

Nevertheless, the latest record highlights the strong scale of foreign-currency inflows into India and provides the RBI with greater resources to manage currency and financial-market pressures.

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