India emerges 5th largest forex reserves holder with $608.99 bn of foreign currency holding

The minister said India’s foreign exchange reserves position is comfortable in terms of import cover of more than 18 months and as a cushion against unforeseen external shocks. Government and the Reserve Bank of India (RBI) are closely monitoring the emerging external position calibrating policies or regulations to support robust macroeconomic growth, he added.

Further giving details on the forex reserve build-up, the minister said that RBI takes regular steps for diversification of forex reserves by scaling up operations in forex swap and repo markets, acquisition of gold and exploring new markets/products, while adhering to safety and liquidity standards. 

“Variation in India’s forex reserves is primarily the outcome of RBI’s intervention in the foreign exchange market to smoothen exchange rate volatility, valuation changes due to movement of US dollar against other international currencies in the reserve basket, movement in gold prices, interest earnings from deployment of foreign currency assets and inflow of aid receipts’ the minister pointed out.

He said a current account deficit, accompanied by increasing foreign exchange reserves, reflects a surplus on the balance of payments, ie, the magnitude of the net capital inflows exceeds the volume of the current account deficit. In 2020-21, India’s balance of payments recorded surplus in both current account and capital account, which contributed to the increase in foreign exchange reserves during the year.

Besides exports and imports of goods and services, the overall stability of the external sector depends on other components of balance of payments, including remittances (transfers), income in the current account, the size of net capital flows and external debt. India is comfortable in most of these external sector vulnerability indicators, the minister added.