Economic Survey 2025 stated that India’s foreign exchange reserves are sufficient to cover 90% of external debt and provide an import cover of more than ten months. This substantial buffer mitigates risks and shields the Indian economy from the crisis arising due to global liquidity tightening, currency depreciation pressures, and trade imbalances.
India’s forex reserves witnessed a robust increase in 2024, bolstered by sustained net positive capital inflows. The country’s forex reserves rose by USD 27.1 billion over the year, largely driven by an expansion in foreign currency assets (FCA), which continue to form the backbone of India’s external reserves.
“The import cover, a crucial indicator of external sector stability, stood at 10.9 months as of December 2024. This increase enhances India’s ability to weather external shocks, with reserve adequacy significantly surpassing the IMF's recommended three-month import cover for emerging economies,” mentioned the survey.
The rise in reserves reflects sustained foreign portfolio investments, stable foreign direct investment (FDI) inflows, and a narrowing current account deficit. The enhanced import cover, a critical metric for assessing external vulnerability, positions India favourably to withstand global financial turbulence. While there have been some moderations in reserves towards the end of 2024 due to the impact of global market volatility and dollar outflows, India’s overall external position remains robust. As highlighted in the Economic Survey, the continued capital inflows and prudent economic management will sustain the country’s resilience in the face of evolving global challenges.
The expansion in forex reserves comes at a time of heightened global economic uncertainty, with central banks in advanced economies mostly maintaining a cautious approach to their monetary policy tightening. The Reserve Bank of India’s active reserve management has played a pivotal role in ensuring exchange rate stability and maintaining investor confidence, shielding the rupee from excessive volatility.
While India continues to attract foreign capital, it has been cautioned that global financial conditions and geopolitical developments will remain key determinants of future reserve accumulation.
With the rupee depreciating constantly against the US dollar, India has been struggling with the forex reserves too. The reserves have been on a declining trend for the last few weeks, and the drop has been attributed to revaluation along with forex market interventions by RBI to help reduce volatilities in the rupee. The forex reserves had increased to an all-time high of USD 704.885 billion in September.
