India's Forex Reserves Hit All-Time High

The forex reserves of the country has hit another ATH of $690 billion, equivalent to the GDP of Poland.

While everyone is distracted by the equity markets, India's forex reserves just hit another all-time high at $690 billion.

Within the last quarter-century, the Reserve Bank of India has increased its forex reserves from $29 billion to the current level - at an astonishing 13.2% CAGR.

With a total import bill amounting to almost a trillion dollars annually, it's extremely important for India to have a robust cache of reserves for any unforeseen eventuality. The growth has accelerated in the last two years, supported by a significant influx of foreign capital.

This surge was driven by strong economic growth and the inclusion of Indian assets in JPMorgan’s key emerging market debt index, which attracted more foreign investment. These factors helped propel the Sensex to new peaks, while the 10-year G-Sec yield dropped below 7%. The sovereign bond yield lowering is a positive factor, as the demand is higher and the govt need not provide high interest rates to make these bonds more attractive to foreign buyers.

Furthermore, the strengthening of the yen and yuan led the RBI to focus on boosting the competitiveness of Indian exports, likely prompting the central bank to buy more foreign exchange and further build up its reserves. Additionally, Non-Resident Indians (NRIs) have played a very key role in this, by remitting foreign currency back to their home country.

If you are an NRI, you might want to check out my guide on how to invest in Indian and U.S. markets here.

NRIs contribute almost $90 billion annually to India’s forex reserves - equivalent to the GDP of Oman!

Why is this Important?

A high level of forex reserves is similar to having a large savings account at your disposal.

It can be your emergency account, and helps you keep your head high among your peers (and even your managers) because you are not dependent on anyone financially (a job, for example). You can use that money to enhance your lifestyle, buy things that are important for you and invest it when the right time arrives.

Similarly, a large forex reserve account enables India to be self-sufficient in global currencies - which are required to buy commodities like oil (which is traded in U.S. Dollars) and pay interest on foreign loans (which can be denominated in U.S. Dollars, Euros, Pounds or Japanese Yen). See, when you are unable to do that, you become dependent on foreign powers who now start asking certain concessions from you - which you may not want to do (very similar to a personal situation).

So it is important than India keeps building its forex reserves. However, it is also important that this does not come at the cost of internal growth and need to be balanced with a good monetary policy.

At the same CAGR level, India will soon hit $1 trillion in forex reserves by 2030.

Now that would be a milestone to celebrate.