Why India’s Foreign Exchange Reserves Are Rising Despite the Rupee’s Continuous Fall

In mid-September 2025, India’s foreign exchange reserves climbed to a record $703 billion. Yet, paradoxically, the Indian rupee weakened to its lowest-ever level against the US dollar, trading at ₹88.75–₹88.80 per dollar on September 25. For the average citizen, this feels contradictory — shouldn’t higher reserves strengthen the rupee instead of allowing it to depreciate? The truth lies in a more complex relationship between reserves and the currency, shaped by global pressures, domestic vulnerabilities, and the RBI’s currency management strategy.

Valuation Effects: Why Reserves Appear Higher

Not all of India’s reserves are denominated in US dollars. They consist of gold, multiple foreign currencies, Special Drawing Rights (SDRs) with the IMF, and India’s reserve position at the IMF. The recent fall in currencies like the euro, yen, and pound against the dollar has inflated the dollar value of these assets. In addition, gold prices have surged to multi-year highs as investors worldwide seek safe-haven assets in uncertain times. With gold forming a significant part of India’s reserves, this revaluation alone boosted the reserves by billions.

For instance, in the week ending September 12, 2025, out of the $4.7 billion increase in forex reserves to $702.97 billion, nearly $2.1 billion came from gold revaluation gains. By the end of September, the RBI’s gold holdings exceeded 880 tonnes, valued close to $90 billion — making up about 12.5% of the total reserves. Thus, even as the rupee depreciates, the rising value of gold and other assets has kept headline reserves at record highs.

Capital Inflows: FDI, Remittances, and Bonds

Beyond valuation, inflows continue to strengthen reserves. India remains an attractive destination for foreign direct investment (FDI) in digital infrastructure, renewable energy, and manufacturing under the Production Linked Incentive (PLI) schemes. Annual remittances are nearing $120 billion, ensuring a steady dollar supply. Meanwhile, expectations of India’s inclusion in global bond indices have encouraged portfolio inflows into debt Markets despite volatility in equities.

The RBI, following the strategy of former Governor Shaktikanta Das, has also been opportunistic — absorbing inflows whenever possible to build a robust reserve “war chest” against external shocks. This strategy has enhanced investor confidence, but it hasn’t stopped the rupee’s decline.

Why Is the Rupee Still Weakening?

The primary reason lies in the strength of the US dollar. Over the past year, the dollar index has surged as global investors shifted toward US assets amid geopolitical tensions, slowing Chinese growth, and Europe’s energy uncertainty. Even after the US Federal Reserve’s rate cut, American yields remain comparatively attractive. As a result, emerging market currencies — including the rupee — are facing sustained pressure.

Domestic pressures are also weighing on the currency. India’s current account deficit (CAD) widened to $2.4 billion (0.2% of GDP) in Q1 FY26, reversing the previous quarter’s surplus. Analysts project CAD may touch 1% of GDP in Q2 as imports rise. Crude oil remains the biggest outflow driver, with Brent crude hovering between $65 and $69 per barrel. Even minor increases in oil prices add billions to the import bill. Additionally, rising imports of gold and electronics have amplified dollar demand. In September alone, foreign portfolio investors sold nearly $1.3 billion in equities due to US visa fee hikes for Indian IT workers and concerns about sector earnings.

RBI’s Strategy: Controlled Depreciation, Not Blind Defense

Unlike in the past, the RBI has avoided burning reserves to defend psychological levels of the rupee. Instead, it intervenes selectively to prevent chaotic volatility while allowing a slow, controlled depreciation. A weaker rupee supports export competitiveness and discourages excessive imports. If the RBI had aggressively defended the rupee at ₹86–87, reserves might have fallen sharply, creating panic. By permitting a gradual decline, the RBI is conserving its firepower while signalling readiness to act if volatility spikes.

Risks of a Weakening Rupee

Despite being a deliberate strategy, rupee depreciation carries risks:

• Imported inflation: Higher costs for crude oil, edible oils, electronics, and other imports increase consumer prices.
• External debt servicing: A weaker rupee raises the cost of repaying overseas loans for Indian companies and the government.
• Political perception: In an election year, opposition parties may portray a weak rupee as a sign of economic weakness.

India’s Policy Dilemma

Excessive RBI intervention could spook investors by signalling desperation, while doing nothing risks sharp depreciation and inflation. Hence, the RBI has adopted a middle path: mitigate volatility, build reserves when inflows allow, and intervene only when depreciation risks becoming disorderly.

Key Factors to Watch Ahead

1. Crude oil prices: A spike beyond $100 per barrel could worsen India’s current account deficit and pressure the rupee.
2. US monetary policy: Faster-than-expected Fed tightening could revive dollar strength, triggering capital outflows from emerging markets.
3. Corporate external debt: Indian companies with high overseas borrowings may face repayment stress if the rupee weakens further.
4. Net usable reserves: While gross reserves stand at $703 billion, forward obligations reduce the actual cushion.

What Can the RBI Do?

The RBI has several tools beyond spot interventions:

• Use forward and swap markets to manage liquidity and expectations.
• Encourage exporters to repatriate earnings faster, improving dollar supply.
• Open bond markets further for long-term global investors.
• Coordinate with the government to manage fiscal deficits and external balances.
• Strengthen communication to reassure markets of its ability and intent to prevent disorderly depreciation.

The Bigger Picture

The global dominance of the dollar means emerging market currencies, including the rupee, will remain under pressure. Geopolitical shocks — from West Asia to East Asia — could trigger sudden capital flight. Domestically, higher inflation and political factors may limit the RBI’s flexibility. Ultimately, experts stress that reserves are not a magic shield; they provide insurance, not guaranteed currency strength.

India’s rising reserves alongside a weakening rupee is not a contradiction but a reflection of global realities. The challenge lies in managing depreciation so that it remains gradual, orderly, and confidence-inspiring rather than disruptive. The RBI’s cautious strategy — building reserves, allowing controlled depreciation, and intervening only against volatility — reflects the complexities of steering an open Economy through turbulent international waters.