India overtakes Russia in forex reserves as RBI stockpile hits record $785.7 billion

India has overtaken Russia in foreign exchange reserves after its forex stockpile jumped by nearly $45 billion in a single week to a record $785.7 billion.

Reserve Bank of India data released on Friday showed that India’s foreign exchange reserves rose by $44.903 billion in the week ended September 4 to $785.706 billion. Russia’s international reserves stood at about $769 billion at the end of August, putting India ahead on the latest available figures.

India is now among the four largest reserve holders in the world, behind China, Japan and Switzerland.

The more striking part of the data, however, is the speed of the increase. India’s reserves have risen for 10 consecutive weeks, adding nearly $120 billion over that period, according to Reuters.

What caused the sudden jump?

The main reason was a sharp increase in foreign currency assets, the largest component of India’s reserves.

Foreign currency assets rose by $47.498 billion in the week ended September 4 to $648.168 billion. The gain was partly offset by a $2.594 billion fall in the value of gold reserves, which stood at $113.816 billion.

India’s special drawing rights with the International Monetary Fund fell marginally to $18.806 billion, while its reserve position with the IMF rose to $4.916 billion.

The size of the weekly increase points to a surge in foreign currency coming into the banking system rather than a simple rise in the value of India’s existing assets.

A major part of that increase is linked to measures introduced by the RBI in June to attract foreign currency deposits and overseas borrowing.

Under the scheme, banks were given incentives to mobilise foreign currency, including through concessional and free-of-cost hedging facilities. Between June 5 and August 31, the RBI had mobilised $136.3 billion under the measures, with non-resident Indian deposits accounting for about $127 billion, Reuters reported.

That explains why the increase has been so large in such a short period.

Why does the reserve number matter?

For an ordinary reader, foreign exchange reserves are essentially the country’s financial cushion in foreign currency.

India needs dollars and other foreign currencies to pay for imports, service external obligations and deal with sudden disruptions in global markets. When the rupee comes under pressure, the RBI can also use its foreign currency reserves to buy rupees and sell dollars in the market.

That buffer has become particularly important as oil prices have climbed and the rupee has remained under pressure.

Reuters reported on Friday that the RBI was likely intervening in the foreign exchange market as the rupee weakened amid higher crude prices. State-run banks were seen selling dollars, apparently on behalf of the central bank.

A larger reserve pile therefore gives the RBI more room to manage sharp swings in the currency and protect the financial system from external shocks.

But the entire $785.7 billion is not a free pile of cash

There is an important detail behind the record number.

Some of the recent increase has come through foreign currency deposits and borrowing that were effectively swapped with the RBI. These transactions increase the central bank’s spot foreign currency holdings, but they also create future obligations in its forward book, Reuters reported.

In other words, the rise in reserves is significant, but it should not be interpreted as though India suddenly received nearly $120 billion of fresh wealth that can simply be spent.

The surge has also created another problem for the RBI: too much rupee liquidity in the banking system.

The large inflows have left banks with surplus funds, pushing short-term interest rates lower. RBI Governor Sanjay Malhotra said the central bank could use tools including bond sales and foreign exchange swaps to absorb excess liquidity.

On Friday, the RBI announced a plan to sell Rs 1 trillion worth of government bonds in three tranches beginning September 16 to withdraw some of that excess liquidity from the financial system.

From a record low point to a new high

The latest number marks a sharp turnaround for India’s reserves.

The stockpile had come under pressure earlier this year as the rupee weakened and the RBI sold dollars to smooth volatility. It then began rebuilding, with reserves rising every week for the past 10 weeks.

The previous record was $740.803 billion in the week ended August 28.

The latest figure is also $94.6 billion higher than the level at the end of March.

For India, the significance of the new record is therefore not just the size of the number. The country now has a substantially larger foreign currency cushion at a time when oil prices, global interest rates and currency markets remain volatile.

But the composition of that reserve build-up matters. The RBI has strengthened its dollar buffer considerably, while also taking on the task of managing the large amount of rupee liquidity created by the inflows.

That makes the latest record as much a story about how India built its forex buffer as about the size of the buffer itself.