India's foreign exchange reserves experienced a significant increase, climbing by $6.1 billion to reach $682.35 billion in the week ending July 24. This marked a nearly two-month high, following a $1.08 billion rise in the preceding week. The primary driver for this growth was the Reserve Bank of India's (RBI) Foreign Currency Non-Resident (FCNR(B)) deposit scheme, which began to attract inflows. Foreign currency assets, the largest component of the reserves, saw an increase of $4.8 billion, reaching $555.92 billion. Gold reserves also contributed positively, rising by $1.3 billion to $103.05 billion during the same period.
Further momentum was observed in the week ending July 31, with reserves increasing by nearly $10.5 billion, the largest weekly jump since late January, bringing the total to $692.9 billion. This build-up reflects the success of the central bank's foreign-currency deposit initiative launched in June, designed to bolster India's external buffers amidst oil price volatility and geopolitical tensions. Economists estimate the RBI's measures could ultimately attract around $50 billion in foreign currency by year-end, potentially pushing reserves past the $700 billion mark.
Despite the robust increase in reserves, analysts anticipate limited upside for the Indian rupee. Much of the incoming foreign capital is expected to be utilized to offset the RBI’s substantial forward dollar commitments, estimated at over $100 billion as of June, rather than supporting a stronger exchange rate. The RBI likely used part of these inflows to reduce its net short dollar forward book, which stood at a record $106.6 billion as of May 31, particularly in near-term maturity contracts. This strategy aims to manage volatility and meet future dollar delivery obligations, thereby limiting the direct impact of increased reserves on rupee appreciation.
