India’s foreign exchange reserves surpassed $600 billion for the first time since May 2022, reaching a 15-month peak. It reached $609 billion as of July 14, increasing for the third consecutive week due to dollar inflows from foreign institutional investors. Reserves grew by $12.74 billion from the previous week, marking their largest gain in four months, primarily due to a rise in US government bonds held by RBI and an appreciation of non-dollar currencies.

RBI holds more than two-thirds of its foreign currency assets in US dollars, with the rest in euro, yen, pound, and Chinese renminbi. The reserves had initially exceeded the $600 billion mark in June 2021 due to record foreign direct investments in the country. The volatility in the forex market following the Ukraine invasion compelled the central bank to sell dollars to stabilize the market.

However, reserves suffered an even greater blow due to successive sharp interest rate hikes in the US, which devalued the bonds held by RBI. Foreign investors have purchased a net $16 billion in Indian equities in the past three months, according to data from the National Securities Depository Limited, enabling the central bank to buy from the market and bolster reserves.

The current level of reserves is sufficient to cover 11 months of imports, up from 9.3 months in December 2022 and 8.9 months in September 2022. Although the government has been promoting international trade in the rupee, maintaining adequate reserves remains a strategic objective of RBI, given that most imports are denominated in dollars.

The rupee concluded at 81.94 on Friday, up 0.1% for the week. “Since October 2022, RBI has been replenishing its reserves, capitalizing on the rupee’s appreciation when it exceeds 82 levels,” stated Careedge Ratings in a report. Positive capital flows are currently bolstering the rupee. “Capital flows have sustained their positive momentum for the fifth consecutive month in July, with the equity segment accounting for the majority of the inflows. Low currency and bond volatility, positive real rates, and improving growth prospects have supported overseas demand,” said Careratings.