Tuesday's Talking Points
India’s Forex Reserves bounce back despite Glocal Volatility
What’s the Point?
- India’s Forex (FX) Reserves increased for 8 consecutive weeks – rising from US$639 billion as on February 28, 2025 to US$688 billion as on April 25, 2025.
- While there has been a drop in US$2 billion last week, the levels remain comfortable with growth mainly driven by a 7% increase in Foreign Currency Assets’ value (~85% of the Total FX Reserves) and a 12% increase in Gold reserves’ value (~12% of the Total FX Reserves) between February 28, 2025 and May 02, 2025.
- As per the Reserve Bank of India (RBI) Bulletin published in April 2025, India’s FX reserves are enough to cover 11 months of imports. Such a cushion is beneficial for maintaining INR’s strength and signals macroeconomic stability, making it a preferable investment destination amidst global macro-vulnerabilities.
Numbers in Perspective
Source: Centre for Monitoring Indian Economy (CMIE), Bloomberg
A Brief Timeline of the Decrease and Increase in India’s FX Reserves in the Recent Past
Over the course of 2024, RBI had been actively selling USD to maintain the stability of INR, which did partly support currency, but led to tighter liquidity conditions. This led to a decline in FX reserves between October and December 2024, as evident from the table below. Since the outcome of the US Presidential elections, RBI did decrease the rate of FX sales (Table 1: Dec-24 to Feb-25), leading to a steeper depreciation of the INR in the recent past, after a prolonged period of narrow range trading – falling over 4% between November 04, 2024 and February 28, 2025.
The announcement of the tariff structure by the US Government on its trading partners on Liberation Day (April 02, 2025) led to considerable uncertainty and volatility across global currency markets. While a 90-day pause on tariffs was subsequently announced, RBI had already begun intervening – encouraged by a lower inflation print – by supplying liquidity through various tools to boost domestic consumption. The USD/INR Swap – one of the key tools – has been used by the RBI to actively purchase USD, and supply INR in order to inject higher liquidity into the system.
Table 1: FX Operations in Onshore / Offshore Over-The-Counter Segment (Source: RBI Bulletins)
Return of Foreign Institutional Flows since March 2025 bolstering our FX Reserves
Between October 2024 and February 2025, FIIs sold nearly ₹2.18 lakh crore in the secondary markets. This was due to a mix of global and domestic factors. Globally, a spike in 10-year US Treasury Yields due to the US Presidential Election results and the strengthening of the US Dollar led FIIs to a shift towards safer assets in developed markets. Domestically, concerns around India's economic growth due to muted consumption growth and higher inflation (due to persistent food inflation) led FIIs to be net sellers. Despite this, India’s overall macroeconomic stability led DIIs to keep the Indian equity markets buoyant, with a net investment of ₹3.37 lakh crore during the same period.
Between March 31, 2025 and May 08, 2025, Indian equity markets recorded a net inflow from FIIs to the tune of ₹26,389 crore, with 93.5% of the inflows witnessed in April and May. This reversal in sentiment has been mainly driven by the easing trade tensions on account of 90-pause on the imposition of tariffs by the US Government, in addition to favourable domestic macro factors like easing inflation, increasing domestic consumption and others. This inflow has aided the rise in India’s FX reserves in the recent times.
Rupee Appreciation – A Potential Positive Influence on our FX Reserves
As witnessed from Chart 2, while there was a sharp increase in the Dollar Index after the outcome of the US Elections (left chart), it has subsequently fallen by 7% (till May 12, 2025) from its peak level touched on January 02, 2025 (right chart). The Rupee, which had depreciated during the same period when the Dollar Index had risen, has appreciated by 2.5% between February 28, 2025 and May 09, 2025. This stabilization of INR is important because it increases the propensity of attracting higher foreign investments.
Conclusion
Recently, India had witnessed significant tensions with its neighbouring country. Despite increased concerns that the INR could depreciate, India’s high level of FX Reserves had a stabilizing influence on the country’s currency. These comfortable FX Reserves levels add to India’s macroeconomic stability characterized by robust outlook on domestic growth, healthy corporate profitability, and policies being supportive and pro-growth.
Sources: RBI, Bloomberg, CMIE, and other publicly available information
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