India's foreign exchange reserves rose by USD 3.7 billion during the week ended May 3 to touch the USD 641.59 billion mark, the latest RBI data released on Friday showed.
Context and Recent Trends
This is the biggest gain in close to two months and reverses the declining trend over the previous three weeks. India's foreign exchange reserves had touched a lifetime high of USD 648.562 billion in April after which they had declined for three weeks in a row by USD 10.6 billion.
RBI Governor Shaktikanta Das on Friday referred to the record foreign exchange reserves as a reflection of the strength of the Indian economy.
"It is our prime focus to build a strong umbrella, a strong buffer in the form of a substantial quantum of forex reserves which will help us when the cycle turns or when it rains heavily," he remarked while unveiling the first monetary policy review of the current financial year that began on April 1.
Impact on Economy and Currency Strength
Rising foreign exchange reserves are positive for the economy as they reflect an ample supply of dollars that help to strengthen the rupee. An increase in the foreign exchange reserves gives the RBI more headroom to stabilise the rupee when it turns volatile.
This is because the RBI intervenes in the spot and forward currency markets by releasing more dollars to prevent the rupee from going into a free fall. Conversely, a declining forex kitty leaves the RBI less space to intervene in the market to prop up the rupee.
India's forex reserves, including the central bank's forward holdings, can now cover more than 11 months of imports, which is a two-year high.
