India’s central bank, the Reserve Bank of India (RBI), is prioritizing the further buildup of its foreign exchange (forex) reserves to bolster economic resilience, according to sources familiar with the bank’s strategy. Strong inflows into India’s equity and debt markets provide an opportunity for the RBI to increase its reserves.
Key Points:
RBI’s Reserve Strategy: The RBI aims to maintain larger buffers of forex reserves to shield the economy from global currency fluctuations. The bank’s forex reserves recently reached a record high of $642.49 billion as of March 15, reflecting its commitment to enhancing financial stability.
Importance of Reserves: RBI Governor Shaktikanta Das emphasized the importance of building higher reserves to safeguard emerging market economies from external shocks. The pace of reserve accumulation has accelerated in recent months, fueled by significant inflows into India’s equity and debt markets.
Assessment of Reserve Adequacy: Analysts assess the adequacy of forex reserves based on factors such as import cover and short-term debt obligations. India’s import cover, currently at 9 months, exceeds conventional benchmarks, indicating robust reserve adequacy.
Strategic Reserve Building: While India’s forex reserves are considered adequate by many metrics, the RBI remains opportunistic in increasing reserves during favorable market conditions. This strategic approach aims to moderate sharp appreciation of the rupee and maintain stability in the currency market.
Future Outlook: Barclays Investment Bank projects India’s forex reserves to surpass $700 billion by the end of 2025. As India’s economy grows, reaching $5 trillion by FY27 and $7 trillion by the end of the decade, the size of forex reserves will need to align with the expanding economy and financial markets.
Overall, the RBI’s focus on bolstering forex reserves underscores its commitment to strengthening India’s economic resilience and ensuring stability in the currency market amidst evolving global dynamics.