Record $44.9bn jump takes India’s forex reserves to lifetime high of $785.71bn

Before the war began at the end of February, India's foreign exchange reserves had already reached a record level.

Amid the US-Iran war, India has achieved its highest foreign exchange reserves ever. Back in 2014, India’s forex reserves were around $300 billion. Since then, they have then risen most years, with the last few years seeing a big bump up as gold prices rallied and the percentage of gold in India’s forex reserves went up.India's foreign exchange reserves surged by a record $44.903 billion in the week ended September 4, taking the country's reserves to a fresh lifetime high of $785.706 billion, according to data released by the Reserve Bank of India (RBI) on Friday.This followed an increase of $11.475 billion in the preceding reporting week, when the overall reserves had climbed to a then-record $740.803 billion.India's forex reserves had been under pressure since the West Asia conflict began earlier this year.

The rupee came under sustained pressure during the period, prompting the RBI to intervene in the foreign exchange market through dollar sales.The trend reversed after the RBI announced concessional forex swap initiatives in June this year amid a sharp fall in the value of the domestic currency. These measures have generated more than $136 billion in fresh flows.According to the latest RBI data, foreign currency assets (FCAs), which form the largest component of India's forex reserves, rose $47.498 billion during the week to $648.168 billion.

When expressed in dollar terms, FCAs also reflect changes resulting from the appreciation or depreciation of non-US currencies held as part of the foreign exchange reserves, including the euro, pound and yen.The value of India's gold reserves, however, declined by $2.594 billion during the week to $113.816 billion.The RBI said the country's special drawing rights (SDRs) with the International Monetary Fund fell by $4 million to $18.806 billion.India's reserve position with the IMF increased by $2 million to $4.916 billion at the end of the reporting week, the central bank's data showed.

Understanding the rise

Before the war began at the end of February, India's foreign exchange reserves had already reached a record level. However, efforts by the Reserve Bank of India to support the rupee, combined with the pressure created by higher fuel costs and rising gold import values, put the reserves under strain.Several months into the conflict, the country has now reported its highest-ever forex reserves.The RBI's approach was relatively straightforward, but it delivered stronger-than-expected results. The central bank encouraged Indian banks to raise foreign-currency deposits from overseas Indians by absorbing the currency-hedging costs associated with FCNR deposits. This reduced the exchange-rate risk for banks and enabled them to offer more attractive returns to depositors.FCNR(B) deposits are foreign-currency deposits that non-resident Indians can maintain with Indian banks, with both the principal and interest denominated in a foreign currency.Banks were also able to use these foreign-currency deposits to extend loans, with some lenders offering loans several times the amount originally deposited. This helped generate additional dollar inflows into the country.The result has been a sharp increase in forex inflows.However, the external pressures facing India have not disappeared. The US-Iran war is still continuing, while the country continues to pay elevated prices for energy imports such as crude oil, LPG and LNG. Foreign investors are also continuing to withdraw funds, while global economic headwinds remain.The increase in forex reserves has strengthened India's external sector buffer and provides the economy with greater protection against external pressures.

However, the outlook could remain challenging as these pressures persist.Questions have also been raised about the eventual hedging cost that the RBI could have to bear. However, reports indicate that the government expects the swap facility to impose limited material costs on the central bank.Economists have estimated that the hedging expense could work out to around 3% of roughly Rs 12 lakh crore, or about Rs 36,000 crore.

Policymakers, however, believe these costs could be offset by returns earned from investing the dollars in US Treasuries.Even with forex reserves at a record level, Prime Minister Narendra Modi has called on Indians to continue conserving foreign exchange. He has urged people to avoid foreign holidays, weddings overseas and unnecessary purchases of gold.