India's foreign exchange reserves reached a record high of $729.3 billion as of August 21, driven largely by substantial inflows of NRI deposits through a specialised swap window operated by the Reserve Bank of India (RBI).

Foreign currency assets, the largest component of the reserves, rose by $9.4 billion during the period, while gold reserves also recorded an increase, according to the data.

The RBI's new facility, launched in June, has attracted $72.85 billion in inflows since its introduction. The initiative is credited with contributing a total of $48 billion to the overall growth in the country's foreign exchange reserves.

Foreign exchange reserves are assets held by a central bank in foreign currencies, gold, Special Drawing Rights (SDRs) and reserve position in the IMF, used to back liabilities and influence monetary policy. India's reserves are reported weekly by the RBI and include foreign currency assets, gold, SDRs and the country's reserve tranche position in the International Monetary Fund.

A larger reserve stock strengthens a central bank's capacity to smooth excessive volatility in the currency and act as a buffer against external shocks, which is a particular consideration for India as a major oil-importing economy exposed to global dollar flows. Stronger reserves are among the metrics tracked by rating agencies and analysts when assessing a country's external position.

The record level reflects the impact of the central bank's efforts to attract dollar inflows from non-resident Indians through the specialised swap window, which has bolstered the country's external buffer. Going forward, the weekly RBI data releases will show whether inflows through the facility, which operates for a defined period after its June launch, continue to support reserve accumulation.

Source: Economic Times Markets