India's foreign exchange reserves have experienced a decline, decreasing by $3.06 billion to reach $696.67 billion, marking the second consecutive week of decrease. This fluctuation in reserves is a noteworthy aspect of India's economic landscape, impacting various facets of financial stability and external trade.

Composition of India's Forex Reserves

The foreign exchange reserves of India comprise several key components:

• Foreign Currency Assets (FCA): These form the largest portion of the reserves and primarily consist of holdings in U.S. dollars in the form of U.S. government bonds and institutional bonds. They also include investments in U.S. Treasury bonds, bonds of other selected governments, and deposits with foreign central and commercial banks.
• Gold: A significant portion of the reserves is held in gold. As of March 2021, the Reserve Bank of India (RBI) held 695.31 metric tonnes of gold, with a portion held in the custody of the Bank of England and the Bank for International Settlements, and the remainder held domestically.
• Special Drawing Rights (SDRs): These are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
• Reserve Tranche Position: This refers to the reserve position of a country in the IMF.

Factors Influencing the Decline

Several factors can contribute to fluctuations in India's forex reserves:

• RBI Intervention: The Reserve Bank of India (RBI) actively monitors and intervenes in the foreign exchange market to maintain stability and prevent excessive volatility in the rupee's exchange rate. The RBI may sell dollars to prevent sharp depreciation of the rupee, which can lead to a decrease in the reserves.
• Valuation Changes: Changes in the valuation of currencies, particularly the appreciation or depreciation of the U.S. dollar against other major currencies like the euro, pound, and yen, can impact the value of the foreign currency assets.
• Import and Export Dynamics: Imbalances in import and export activities can also affect forex reserves. A current account deficit, where a country spends more on imports than it earns from exports, can lead to a depletion of reserves.
• Capital Flows: Large and sudden movements in foreign portfolio investments (FPI) can cause volatility in the forex market, prompting RBI intervention and affecting reserve levels.

Importance of Forex Reserves

Maintaining a healthy level of foreign exchange reserves is crucial for several reasons:

• Exchange Rate Stability: Adequate reserves enable the RBI to manage exchange rate volatility and maintain orderly market conditions.
• Import Cover: Forex reserves provide a cushion to finance imports, ensuring smooth trade and economic activity.
• External Debt Management: A strong reserve position enhances a country's ability to meet its external debt obligations.
• Financial Stability: Forex reserves act as a buffer against external shocks and provide confidence to investors.

RBI's Role in Managing Forex Reserves

The RBI plays a pivotal role in managing India's forex reserves:

• Intervention: The RBI intervenes in the forex market by buying or selling dollars to stabilize the rupee's value. This intervention is aimed at cushioning volatility without targeting any specific exchange rate.
• Exchange Rate Policy: India follows a market-determined exchange rate system, with the RBI intervening occasionally to maintain orderly conditions and curb excessive volatility.
• Liquidity Management: The RBI uses various tools, such as dollar-rupee buy/sell swap auctions and open market operations, to manage liquidity in the forex market.

Current Status and Trends

While India's forex reserves have experienced recent declines, they remain at a substantial level. As of June 13, 2025, the reserves had reached an all-time high of USD 698.95 billion. However, recent data indicates a decreasing trend, with reserves falling to $696.67 billion in July 2025. The RBI's interventions in the currency market, along with valuation changes and other factors, contribute to these fluctuations.

Historical Context

India's forex reserves have grown significantly over the decades. In 1991, the reserves stood at $5.8 billion, rising to $29.3 billion by March 1997. By 2004, they had surpassed the $100 billion mark. The reserves reached an all-time high of $704.89 billion in September 2024.

The management of foreign exchange reserves is a complex and dynamic process, influenced by various global and domestic factors. The RBI's active role in monitoring and intervening in the forex market is crucial for maintaining stability and ensuring the resilience of the Indian economy.