India’s foreign exchange reserves rose by $19.4 billion in nominal terms during April–December 2025, reversing the $10.7 billion depletion recorded in the same period last year, according to data released by the Reserve Bank of India (RBI).
However, when adjusted for valuation effects and calculated on a balance of payments (BoP) basis, the picture looks different. Excluding valuation gains, forex reserves actually declined by $30.8 billion during the first nine months of FY2025–26, compared to a $13.8 billion depletion in the corresponding period of FY2024–25.
The central bank released the detailed “Sources of Variation in Foreign Exchange Reserves in India” data on Monday, shedding light on the underlying drivers of the change.
Valuation Gains Drive Headline Surge
A significant portion of the headline increase was driven by valuation gains, which jumped sharply to $50.2 billion during April–December 2025, up from just $3.1 billion in the same period last year.
These gains were primarily attributed to:
- Higher international gold prices
- Depreciation of the US dollar against major global currencies
- Lower global bond yields
As India’s forex reserves include assets denominated in multiple currencies and gold holdings, fluctuations in exchange rates and asset prices can significantly impact the reported total without necessarily reflecting fresh capital inflows.
Current Account Deficit Narrows
The data also showed some improvement in India’s external balance position.
The current account deficit (CAD) narrowed to $30.2 billion during April–December 2025, compared with a deficit of $36.7 billion in the same period of the previous fiscal year.
A lower CAD indicates relatively improved trade and services balance dynamics, even though external pressures remain amid volatile global commodity prices and geopolitical tensions.
Capital Account Swings Into Deficit
In contrast, the capital account registered a deficit of $0.6 billion during April–December 2025, compared to a healthy surplus of $22.9 billion in the year-ago period.
The shift from surplus to deficit suggests weaker net capital inflows — such as foreign direct investment (FDI), foreign portfolio investment (FPI), and external borrowings — during the current fiscal year.
Understanding the Divergence
The divergence between the nominal increase in reserves and the BoP-based decline highlights the difference between:
- Headline reserves, which include valuation changes due to market movements, and
- Underlying flows, which reflect actual foreign currency inflows and outflows.
While rising gold prices and a softer US dollar boosted the reported reserve figure, net external flows exerted pressure on reserves during the period.
What It Means for India
Despite the underlying depletion on a BoP basis, strong valuation gains have helped maintain the overall reserve buffer — a key factor in managing currency volatility, external shocks, and import cover.
With global markets facing uncertainty from geopolitical tensions and energy price volatility, the RBI’s reserve position remains a crucial stabilising tool for India’s macroeconomic management.