Foreign exchange reserves
Also: forex reserves, foreign exchange reserves, FX reserves
Background and evolution
Reserves also reflect a policy choice about the exchange rate. A country that lets its currency float completely needs fewer reserves, while one that wants to limit volatility needs more. India's managed float, partial capital account convertibility and reliance on foreign portfolio investment all point towards holding a substantial buffer.
For a developing economy, foreign exchange reserves are a form of insurance. In 1991, India's reserves were so low that it could barely pay for a few weeks of imports, and the government had to pledge gold with foreign banks to raise emergency loans. That experience, along with the Asian financial crisis of 1997, convinced policymakers that a large stock of reserves was essential to protect the economy from sudden stops in capital inflows and speculative attacks on the currency.
Since then, India has built reserves steadily, mainly by buying dollars when capital inflows were strong. These reserves now rank among the largest in the world. This page looks at reserves from a practical angle: how they are built and used, how to judge whether they are adequate, and what holding them costs, while external debt and investment flows are covered in the linked lesson.
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Last reviewed: 23 October 2026 · Original UPSCPrep.in content.