India's foreign exchange reserves are sums of money or other assets held by the country's central bank, the Reserve Bank of India (RBI), in international currencies like dollars, euros, or yen. These reserves are not kept in the Indian rupee, which is India's national currency.

In simple terms, these reserves include cash, bank deposits, bonds, and other types of financial assets that India owns in international currencies. The reserves are maintained by the RBI under the supervision of the Indian government, with the majority being foreign currency assets.

Purpose of Foreign Exchange Reserves

The foreign exchange reserves serve as a safety net for India when there are economic downturns. Even though the reserves are necessary, the process of obtaining these reserves is not cost-free.

The reserves are used for several roles: they make international trade easier and foster an orderly development and maintenance of the foreign exchange market in India. In essence, they help smooth out disruptions in the foreign exchange markets, making things more stable and predictable.

Structure of India's Foreign Exchange Reserves

As of 08 September 2023, India’s total foreign exchange reserves were about US$598.89 billion. Within these reserves, the foreign currency assets component was around US$530.691 billion.

Gold reserves, another critical part of the country’s foreign reserves, amounted to approximately US$44.939 billion. India also holds special drawing rights (SDRs) with the International Monetary Fund (IMF), an international monetary reserve currency created by the IMF, which stood at about US$18.195 billion.

Moreover, India's reserve position or interest in the IMF equaled around US$5.073 billion. These details were presented in the RBI's weekly statistical supplement released on 08 September 2023. According to the Economic Survey of India in 2014-15, India set a goal to reach foreign exchange reserves from US$750 billion to US$1 trillion.

Composition of India's Foreign Exchange Reserves

India's foreign exchange reserves primarily consist of the United States Dollar and its forms, consisting of U.S. government bonds and institutional bonds. In addition to cash reserves in dollars, India's foreign exchange reserves include money invested in U.S. treasury bonds, bonds from other select governments, and deposits held with foreign central and commercial banks.

As per the data available till September 2021, India's contribution to the nation's forex reserves in gold is approximately 7.34 percent. With this accumulation of reserves, India held the position of the fourth-largest foreign exchange reserves in the world, following Switzerland.

Foreign Currency Assets (FCA)

As of March 2021, India's total Foreign Currency Assets (FCA) amounted to $536.69 billion. These assets are held mainly in currencies like the US Dollar, Euro, and British Pound. FCAs are the largest component of the Indian foreign exchange reserves and are managed by the Reserve Bank of India (RBI).

The breakdown of these FCAs includes: - $359.87 billion, which is tied up in overseas securities such as Treasury bills of foreign governments. - $153.39 billion, which has been deposited with other central banks across the world. - Approximately $23.42 billion (4.36 percent of the total FCAs), which is deposited with overseas commercial banks.

These FCAs act as reserve assets and can be leveraged by the RBI during times of economic upheaval to stabilize the Indian economy.

Gold Reserves

As of March 2021, the RBI held about 695.31 metric tonnes of gold. Gold reserves form a significant part of India's foreign exchange reserves as they are highly liquid and can be easily sold to meet any emergent needs.

The RBI keeps its gold reserves in two locations: - 403.01 metric tonnes are kept under the custody of international institutions like the Bank of England and the Bank for International Settlements. - Around 292.30 tonnes of gold is held domestically within the country.

The gold reserves of the country act as a safeguard against inflation and can be utilized to earn returns.

Special Drawing Rights (SDRs)

Special Drawing Rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF). India, being a member of the IMF, receives SDRs which form a part of the country's foreign exchange reserves. SDRs provide liquidity to the global economic system and can be exchanged for freely usable currencies.

Reserve Tranche Position

Reserve Tranche Position (RTP) is India's quota at the IMF and part of its foreign exchange reserves. It represents the portion of the assigned quota that the country can draw upon without any condition. A favorable RTP enhances India's borrowing capacity from the IMF and can be crucial during financial crises.

In conclusion, India's foreign exchange reserves comprise FCAs, gold, SDRs, and RTP, which are critical to maintaining financial stability. These reserves help the country manage risks associated with exchange rates, liquidity, and balance of payments crisis. Regular review of these reserves allows for strategic financial planning to ensure the economic health of the country.

Evolution of India's Forex Reserves

1960: Initial Stages of Forex Reserves

In the year 1960, the foreign exchange (forex) reserves of India were enough to cover only 8.6 weeks of imports. This highlights the country's then limited ability to pay for imported goods and services.

1980: Growth of Reserves

The Indian economy saw significant growth in forex reserves by 1980. The reserves had swelled to over US$ 7 billion, which was double the forex reserves of China (US$ 2.55 billion) during the same period.

1990: Forex Reserves Downturn

By 1990, the country faced a downturn, with forex reserves just covering 4.8 weeks of imports. This indicated a growing gap between the country's import requirements and available forex reserves.

2004: Major Milestone Achievement

India achieved a milestone in 2004 when its forex reserves crossed the US$ 100 billion mark for the first time. This was indicative of the country's strengthening position in the global economy.

2009: Challenges and Rising Gold Reserves

The Financial Year (FY) 2009 saw a depreciation of the Indian Rupee against the US Dollar by 22%. This forced India to sell dollars worth nearly US$ 35 billion in the spot markets. During the same period, India expanded its gold reserves by purchasing 200 tonnes of gold from the International Monetary Fund (IMF), an investment that amounted to US$ 6.7 billion.

2020: An Historic Increase

In June 2020, the Indian forex reserves experienced an unprecedented increase, crossing the US$ 500 billion mark for the first time in the country's history.

2021: Yet Another Milestone

Continuing its upward trend, the forex reserves soared, crossing the US$ 600 billion milestone in June 2021.

2021 - 2024: Record-Breaking Reserves

The country's forex reserves reached an all-time high of US$ 642.453 billion on September 8, 2021. Despite experiencing a dip in 2023 to USD 598.89 billion, the reserves rose and hit a new all-time high of US$ 642.63 billion in March 2024.

To summarize, the decades spanning from 1960 to the 2020s saw a considerable expansion in India's forex reserves, reflecting the nation's evolving economic health. Fueled by numerous factors such as exports, foreign remittances, and foreign direct investment, the reserves are expected to play a pivotal role in supporting India's growth story.