India has large foreign-exchange reserves; holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than India's national currency, the Indian rupee. The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.
Foreign-exchange reserves act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs. Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
India's total foreign exchange (Forex) reserves stand at around US$608.081 Billion on 11 June 2021, the highest ever, with the Foreign Exchange Assets (FCA) component at around US$563.457 Billion, Gold Reserves at around US$38.101 Billion, SDRs (Special Drawing Rights with the IMF) of around US$1.512 Billion and around US$5.011 Billion Reserve Position in the IMF, as per Reserve Bank of India's (RBI) weekly statistical supplement published on 04 June 2021. The Economic survey of India 2014-15 said India could target foreign exchange reserves of US$750 Billion-US$1 Trillion.
India's foreign exchange reserves are mainly composed of US dollar in the forms of US government bonds and institutional bonds. with nearly 6.2% of forex reserves in gold. The FCAs also include investments in US Treasury bonds, bonds of other selected governments and deposits with foreign central and commercial banks. As of January 2021, India holds fourth largest foreign-exchange reserves in the world following SWITZERLAND.
Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.
The Foreign exchange reserves of India consists of below four categories;