India forex reserves dollar 675 billion

India’s Forex Reserves Surge to Historic $675 Billion, Reflecting Strong External Sector: RBI Chief

India’s foreign exchange reserves have reached an unprecedented level, hitting a historic high of $675 billion as of August 2, 2024. This significant achievement underscores the resilience of India’s external sector and the overall strength of the country’s economic fundamentals. On Thursday, Reserve Bank of India (RBI) Governor    Shaktikanta Das highlighted these developments, emphasizing that India’s external financing needs are well-covered, providing a strong buffer against global economic uncertainties.

Resilience in India’s External Sector

Governor Das noted that India’s external sector remains robust, with key economic indicators showing steady improvement. One of the most notable developments has been the significant reduction in the current account deficit (CAD). For the fiscal year 2023-24, India’s CAD moderated to 0.7% of GDP, a sharp decrease from 2.0% in the previous fiscal year. This improvement was primarily driven by a lower trade deficit coupled with strong performance in services exports and remittances from the Indian diaspora.

The narrowing of the CAD is a crucial development for the Indian economy, signaling a more balanced external account and reduced reliance on external borrowing. The decline in the trade deficit was supported by both a reduction in imports and consistent growth in exports. Additionally, India’s services sector, particularly in IT and software exports, continued to perform robustly, contributing to the inflow of foreign exchange and the overall stability of the external sector.

Trade and External Financing Dynamics

In the first quarter of the fiscal year 2024-25, there was a  widening of the merchandise trade deficit as imports outpaced exports. However, the buoyancy in services exports and the continued strong inflow of remittances are expected to keep the CAD within manageable levels. Governor Das expressed confidence that the CAD would remain sustainable throughout the current financial year, reflecting the resilience of India’s external sector amidst fluctuating global economic conditions.

On the external financing front, there was a notable shift in foreign portfolio investments (FPI). After experiencing outflows of $4.2 billion in April and May 2024, foreign portfolio investors turned net buyers in the domestic market from June onwards. Between June and August 6, 2024, net FPI inflows amounted to $9.7 billion, reflecting renewed investor confidence in the Indian market. This turnaround in FPI is a positive indicator, contributing to the overall health of India’s external accounts.

Surge in Foreign Direct Investment

Foreign direct investment (FDI) has also shown significant growth in the current fiscal year. During the period of April-May 2024, gross FDI increased by over 20% compared to the same period in the previous year. This sharp rise in FDI inflows is a testament to India’s attractiveness as an investment destination, supported by a stable macroeconomic environment and proactive government policies.

The RBI’s data revealed that FDI flows rose sharply to $15.2 billion in April-May 2024-25, up from $12.3 billion in the same period a year earlier. Net FDI flows, which take into account repatriation, doubled to $7.1 billion during this period, compared to $3.4 billion in the previous year. This surge in net FDI is particularly noteworthy as it indicates increased investor confidence and a lower repatriation of profits, suggesting that foreign investors are reinvesting earnings in the Indian economy rather than withdrawing them.

Other External Funding Channels

In addition to FDI and FPI, other external financing channels have shown positive trends. External commercial borrowings (ECB) moderated during April-June 2024-25, reflecting a cautious approach by Indian corporates in raising debt from international markets. Meanwhile, non-resident deposits saw higher net inflows during April-May 2024 compared to the previous year. These deposits are an important source of foreign exchange for India, providing additional support to the country’s forex reserves.

Strategic Importance of High Forex Reserves

India’s record-high forex reserves of $675 billion represent more than 10 months of import cover, providing a significant cushion against external shocks. These reserves are crucial for maintaining the stability of the Indian rupee, managing the country’s external obligations, and instilling confidence among investors and rating agencies. The large reserve buffer also gives the RBI the flexibility to manage exchange rate volatility, ensuring that the economy remains insulated from global financial disruptions.

Governor Das’s remarks reflect the RBI’s commitment to maintaining financial stability and supporting India’s economic growth. As global economic conditions continue to evolve, the RBI’s focus on strengthening forex reserves and managing the external sector will remain a key priority.

Hyderabad new TGSRTC bus services