India's foreign exchange reserves surged past $700 billion for the first time in the week ending September 27, reaching a record $705 billion, according to official data. This stockpile, the fourth-largest in the world, has been bolstered by foreign inflows into the nation's stocks and bonds. The Reserve Bank of India (RBI) has used these reserves to stabilize the rupee, preventing extreme fluctuations in the currency, which remains near a record low.

Bank of America predicts the reserves could increase to $745 billion by March 2026, providing the RBI with more leverage to manage the rupee’s performance. “The central bank appears comfortable holding larger reserves to build buffers against external risks,” analysts Rahul Bajoria and Abhay Gupta were quoted in a Bloomberg report, adding that India’s reserves are strong compared to other emerging markets.

The build-up in reserves is supported by a balance-of-payments surplus, aided by a narrower current-account deficit. RBI Governor Shaktikanta Das has emphasized the importance of maintaining a forex buffer to protect the economy during periods of market volatility.

Bajoria and Gupta also pointed out that recent fluctuations in the USD/INR rate have given the rupee some room for limited appreciation. “Despite higher volatility, the RBI can continue its goals of accumulating reserves and maintaining currency competitiveness,” they wrote.

Meanwhile, global tensions, particularly in the Middle East following Iran’s missile attack on Israel, have led to rising oil prices. This conflict has raised concerns about potential disruptions in oil supply, which could influence interest rate decisions globally.

As central banks around the world, including the U.S. Federal Reserve, begin easing monetary policies, the RBI faces challenges. While the Indian economy has shown resilience, external risks, including rising geopolitical tensions, could impact growth and inflation. As a result, the RBI is expected to proceed cautiously in its future policy decisions.

Although India’s economic growth remains solid, risks from global uncertainties and inflationary pressures persist. While inflation is currently declining, food and fuel prices remain areas of concern for the RBI, which is closely monitoring these developments before making any significant changes to its monetary stance.

(With Inputs From Agencies)