India Becomes 4th-Largest Forex Holder

India has moved up to fourth place globally in foreign exchange reserves after a record surge in dollar inflows lifted its reserves to $785.7 billion, according to data compiled by Bloomberg.

India’s forex reserves increased by $44.9 billion in the week ended September 4, allowing the country to overtake Russia. India now ranks behind China, Japan and Switzerland among the world’s largest holders of foreign exchange reserves.

The sharp rise was driven by strong foreign currency inflows linked to the Reserve Bank of India’s foreign currency non-resident bank (FCNR(B)) deposit scheme, which has helped bring additional dollars into the banking system.

The increase came despite a $2.59 billion decline in India’s gold reserves, which stood at $113.81 billion during the week as global gold prices fell.

A larger foreign exchange cushion gives the Reserve Bank of India greater flexibility to manage periods of volatility in the rupee. The central bank can use its reserves to intervene in spot and forward currency markets by supplying dollars when necessary to prevent sharp falls in the currency.

The surge in foreign currency inflows has also contributed to excess liquidity in India’s banking system. In response, the RBI has announced plans to sell government securities worth Rs 1 lakh crore through open market operations.

The bond sales will take place in three tranches: Rs 50,000 crore on September 17, followed by Rs 25,000 crore each on September 21 and September 28.

The auctions will use a multiple-price method through a multi-security auction.