How ample is India’s forex reserves?

Executive Summary

India’s total forex reserves have reclaimed the USD 600 bn mark in Jul-23 after a gap of almost 13-months. The sequential increase of USD 31 bn in forex reserves in FY24 so far appears impressive. The question that may come naturally is are these reserves good enough and how do we compare with other nations in the world? This article attempts to address that question.

The total forex reserves held globally is estimated to be around USD 14.1 trillion in 2022, out of which India accounted for 4% share. That resulted in India being the fifth largest holder of official forex reserves in the world (excluding USA). Before the end of 2023, India is likely to become the fourth largest holder of forex reserves by displacing Russia.

India’s nightmarish experience with the 1991 BoP crisis, followed by global shocks like the 1997 Asian Financial Crisis, the 2008 Global Financial Crisis, the 2013 Taper Tantrum episode, and the 2020-22 Covid Pandemic has institutionalised the accumulation of forex reserves as a natural defence mechanism, thereby underpinning the precautionary motive for holding reserves.

International convention suggests four broad indicators to assess reserve adequacy: (i) Purchasing power of forex reserves in terms of number of months of imports (ii) Forex reserves as a normalized ratio of GDP or broad money supply (iii) Ratio of forex reserves to country’s external debt and (iv) Modified Guidotti-Greenspan Rule which says a country should hold forex reserves to cover all foreign debt maturities due within a year adjusted for the current account gap.
Going by all these parameters, India’s current reserves are more than adequate to guard against sudden BoP shocks. While the policy makers in India are likely to remain cautious given the external headwinds, a structural shift in India’s current account position brought about by the "China Plus” opportunity in manufacturing exports and the sustained buoyancy in the services exports, may lead to a change in India’s forex reserve strategy over the long term.

Suman Chowdhury
Chief Economist & Head of Research, Acuité Ratings & Research