India’s forex reserves provide 95% cover for outstanding external debt: RBI Bulletin

Mumbai, July 23, 2025 – India’s foreign exchange reserves have reached a robust level, offering 95% coverage of the country’s outstanding external debt, according to the latest RBI Bulletin. This development underscores the nation’s strengthened macroeconomic stability and enhanced ability to withstand global financial shocks.

Forex Cushion Strengthens India’s Economic Resilience

In its July 2025 bulletin, the Reserve Bank of India (RBI) highlighted that as of March 2025, India’s forex reserves stood at approximately $658 billion, while the total outstanding external debt was pegged at around $692 billion. This ratio represents one of the highest reserve-to-debt covers India has recorded in the past decade.

“The high reserve coverage ratio reflects India’s prudent external sector management and a conservative approach towards external borrowings,” the RBI noted in the bulletin.

This surge in forex reserves is attributed to sustained capital inflows, a narrowing current account deficit, and steady remittance inflows from the Indian diaspora, which reached a record $115 billion in FY25.

Composition and Trends in External Debt

India’s external debt profile, as outlined in the bulletin, remains favorable. Around 47% of the debt is denominated in US dollars, followed by the Indian rupee (31.6%), Japanese yen (5.7%), and Special Drawing Rights (SDRs) (4.9%).

Moreover, the share of short-term debt (with an original maturity of up to one year) declined to 18.1% of total external debt, down from 20.2% last year. This shift reduces rollover risks and improves the debt sustainability outlook.

“India’s external debt remains within sustainable limits, and the decline in short-term debt suggests a deliberate policy tilt towards more stable and long-term borrowings,” said Dr. Aarti Nair, Chief Economist at Artha Financial.

Strong Reserves Amid Global Uncertainty

The RBI emphasized that maintaining high forex reserves is crucial amid increasing global financial volatility, ongoing geopolitical conflicts, and persistent interest rate hikes by major central banks such as the US Federal Reserve.

India’s improved forex position provides critical insulation against such headwinds, enabling the RBI to intervene effectively in currency markets to manage volatility in the rupee without jeopardizing macroeconomic stability.

“These reserves act as a self-insurance mechanism and provide the RBI with policy flexibility,” said Raghav Goenka, FX strategist at Axis Capital. “In case of global disruptions or capital outflows, the central bank has adequate ammunition to prevent disorderly market movements.”

Implications for the Rupee and Monetary Policy

A strong reserve cover has also helped the Indian rupee maintain relative stability despite external pressures. Over the past year, the rupee depreciated only marginally by 1.2% against the US dollar — a far lower rate compared to many emerging market peers.

With inflation moderating and GDP growth projected at 6.8% for FY26, the RBI is expected to maintain its calibrated monetary stance. Analysts believe the reserve buffer will allow greater flexibility in rate-setting and reduce vulnerability to external monetary shocks.

“The RBI's ability to buffer external shocks has improved markedly. This could encourage a more accommodative stance in the event of growth moderation,” said Tanisha Reddy, macro strategist at ICICI Securities.

Investor Sentiment and Market Context

The robust reserve position is already reflecting positively on investor sentiment. India’s sovereign credit outlook remains stable, and the spread on Indian government bonds has narrowed in recent weeks. Foreign Portfolio Investment (FPI) inflows into equities and debt instruments crossed $12.4 billion in Q1 FY26.

The RBI's intervention in the forex market has been strategic, ensuring minimal market disruption. Market participants see the central bank’s action as confidence-boosting rather than suppressive.

“Global investors now view India as a more resilient destination,” said Siddharth Jain, Head of Research at Ambit Capital. “With high reserves and a shrinking current account deficit, India is better placed than most EMs to withstand future shocks.”

Risks and Future Outlook

While the outlook is broadly positive, the RBI warned against complacency. Factors such as sustained oil price volatility, potential capital outflows due to US rate hikes, or geopolitical escalations could still impact India’s external balances.

Furthermore, analysts note that maintaining reserve adequacy must go hand-in-hand with boosting export competitiveness and reducing dependence on volatile capital flows.

Nonetheless, with the current trajectory, India is well-poised to achieve a healthier external sector balance and maintain investor confidence.

India’s forex reserves covering 95% of its external debt marks a significant milestone in its economic journey. It reflects the effectiveness of prudent policy-making and the resilience of India’s external sector in a turbulent global environment.

With sustained capital inflows, rising remittances, and strategic reserve management, India has fortified itself against future financial uncertainties, cementing its position as one of the most stable emerging economies.