India’s Forex Reserves Hit Record $785.71 Billion After Massive Weekly Surge, FCNR Deposits Lead Inflows

India’s foreign exchange reserves have surged to a record $785.71 billion, giving the Reserve Bank of India a much larger cushion to deal with oil-price shocks, capital outflows and pressure on the rupee. But the record also comes with a less visible challenge: the huge inflows have flooded the banking system with rupee liquidity, forcing the central bank to take fresh steps to absorb it.

RBI data showed reserves rose by $44.9 billion in the week ended September 4, the biggest weekly increase on record. The jump was driven mainly by foreign currency assets, which climbed nearly $47.5 billion, while the value of gold holdings fell by about $2.6 billion. The latest rise extended the reserve build-up to a 10th consecutive week, taking the increase over that period to nearly $120 billion.

A major driver has been the RBI’s special forex-swap facilities launched in June to encourage overseas foreign-currency inflows. By August 31, these schemes had mobilised about $136.4 billion, including $127.2 billion through FCNR(B) deposits, with the rest coming from overseas foreign-currency borrowings and external commercial borrowings. The response was so strong that the FCNR(B) mobilisation window was closed earlier than initially planned.

However, the $136.4 billion mobilisation should not be confused with the $44.9 billion weekly addition to reserves. Much of the foreign currency came through deposits and borrowing arrangements that create future obligations. Analysts have also cautioned that the headline reserve level could eventually settle lower as the RBI manages its forward dollar positions.

The inflows have created another problem at home. Banking-system surplus liquidity has climbed above ₹10 lakh crore, pushing overnight rates below the RBI’s policy rate. After VRRR operations failed to absorb enough of the excess, the RBI announced a ₹1 lakh crore sale of government securities in three tranches from September 17 to September 28. Governor Sanjay Malhotra has said the central bank has several tools available to manage the situation.

The reserves nevertheless give the RBI greater firepower to smooth rupee volatility. The central bank has already been intervening in the currency market, with bankers estimating dollar sales of at least $8 billion in one recent week.

The bigger picture is therefore mixed: India has built a powerful external buffer, but part of that strength has come with future liabilities and a sizable domestic liquidity-management challenge.