Bank of America forecasts that India's foreign exchange reserves will increase to $745 billion by March 2026, providing the Reserve Bank of India (RBI) with enhanced capabilities to influence the rupee's value.
According to analysts Rahul Bajoria and Abhay Gupta, the RBI appears comfortable with holding larger forex reserves to create a safety net against potential external risks. They noted that India's reserves are robust when compared to other major emerging markets, though not excessive.
Currently, India holds the fourth-largest foreign reserves globally, amounting to $692 billion. This growth is largely attributed to increased foreign investments in the country’s stock and bond markets, enabling the RBI to build its reserves to record levels. The reserves play a crucial role in stabilizing the rupee against external economic shocks, helping the RBI manage extreme fluctuations in the currency, especially when it approaches historical lows.
The anticipated rise in forex reserves is expected to result from a surplus in the balance of payments, driven by a reduced current-account deficit, the analysts explained. RBI Governor Shaktikanta Das has consistently emphasized the importance of building a strong forex buffer to protect against market volatility.
Bajoria and Gupta highlighted that recent fluctuations in the USD/INR exchange rate have provided some room for limited appreciation of the rupee. They also noted that the RBI can achieve its goals of increasing reserves while keeping the currency competitive and allowing for modest appreciation of the rupee against other currencies.
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