On 1 May 2026, the Reserve Bank of India (RBI) held $690.7 billion in foreign exchange reserves.
Of this, foreign currency assets (FCAs) like the US dollar, euro, and yen held in liquid short-term securities and overseas deposits totalled $551.8 billion (80 percent); gold accounted for $115.2 billion (17 percent); and the remainder was held in International Monetary Fund (IMF)-linked assets like Special Drawing Rights (SDRs) and reserve tranche positions.
A year earlier, on 2 May 2025, the RBI’s forex reserves stood at $686 billion—with FCAs amounting to $581.2 billion (85 percent) and gold $81.8 billion (12 percent). Two years ago, on 3 May 2024, forex reserves amounted to $641.6 billion, with FCAs making up $564.2 billion (88 percent) and gold $54.9 billion (8.6 percent).
Since 2024, while the overall forex reserves increased by nearly 8 percent, FCAs slipped 2 percent and gold reserves soared by a massive 110 percent.
Since gold reserves cannot be deployed to increase dollar supply through RBI intervention—when the demand for the dollar shoots up on account of higher oil, gas, and gold prices or other imports—forex reserves lose their striking ability to protect the exchange value of the rupee to that extent.
The Swap Problem
One more factor has been at play making forex reserves partly unusable.
The RBI, wanting to keep high level of forex reserves, introduced a myopic scheme of buying US dollars now and selling later after two or three years, technically known as a US dollar-rupee swap. Such swaps suit both exporters and importers.
Importers purchase dollars in the market and sell them to the RBI at current prices, while receiving the assurance of accessing those dollars two or three years later at a relatively low forward premium, effectively a modest interest cost.
The RBI does not publish the swap data promptly or transparently. Such buy-sale swaps reportedly touched around $90 billion at end-March 2025 and are currently estimated a little less. From the forex reserves viewpoint, the outstanding buy-sale swap amount effectively reduces available forex reserves.
About $115 billion worth of gold reserves and $80 billion of outstanding buy-sale swaps have effectively reduced usable forex reserves by $200 billion to less than $500 billion.
Such dwindled forex reserves make the RBI appear, to an extent, a paper tiger.
RBI Unwilling to Spend Reserves
The most effective and appropriate policy tool for the RBI when foreign currency demand goes up abnormally is to sell dollars from forex reserves.
The RBI has historically been prompt in buying dollars whenever there is a glut in supply, which not only prevents the rupee from appreciating excessively but also helps build forex reserves. Every RBI governor has considered building forex reserves as their singular achievement. Growing reserves earn the governor appreciation from political leadership as well.
On the contrary, whenever the demand for the dollar shoots up, putting pressure on the rupee exchange rate, the RBI dithers in using forex reserves to bridge the demand-supply gap.
This has become the RBI’s mindset. Using reserves to increase the dollar supply makes the RBI uncomfortable. The RBI likes to wish away the pressure on the rupee, though it does subject other market players to restrictions.
This mindset partly explains why the RBI has used only around $30 billion of FCAs over the past year—from $581.2 billion on 2 May 2025 to $551.8 billion on 1 May 2026. Compared with FCAs of $564.2 billion on 3 May 2024, reserves are down by less than $13 billion. A closer examination suggests even this decline was partly due to the RBI's purchases of gold using dollar reserves.
This unwillingness to use forex reserves has contributed to a sharp, unusual, and unprecedented depreciation of the rupee. The RBI does not seem unduly uncomfortable with this situation as it, ironically, makes the RBI earn big rupee profits and deliver high surpluses to the government (rupee depreciation bloats the RBI’s assets stated in rupee and generates larger profits, converting foreign currency assets purchased at lower exchange rate into higher-priced assets).
This weird incentive, along with a diffident mindset, leaves the nation and the people to suffer the damage from high rupee depreciation, including capital outflows and weaker investor returns. Foreign investors’ actual returns turned negative last year.
Current Crisis and the Rupee
The current crisis, rooted in India’s long-term structural weaknesses, is making matters significantly worse.
India’s excessive dependence on crude oil imports (now at 88 percent, up from around 70 percent in 2014) and natural gas imports, where dependency is roughly 50 percent, leaves the country highly vulnerable. Long-discussed crude and gas pipeline projects from Central Asia and the Middle East, including from Turkmenistan, Iran and Qatar, remain stalled. India’s lack of trade engagement with Pakistan has effectively turned many such pipeline proposals into pipe dreams. Meanwhile, Indian airlines are forced to take longer routes around Pakistani airspace, increasing aviation turbine fuel (ATF) consumption and costs.
Likewise, our policy choice of importing solar wafers, cells, and modules from China (and Chinese companies elsewhere) instead of allowing Chinese companies to invest in manufacturing these products in India has negatively impacted our energy transition to renewables. Ever increasing trade deficit with China is building more pressure on the rupee.
The current energy crisis, caused by blockade of Strait of Hormuz and serious damage to West Asian oil and gas infrastructure, is unlikely to see normalcy anytime soon.
The government has also raised import duties on gold, increasing domestic prices further. However, Indian consumers remain largely indifferent to rising global prices or higher duties when purchasing gold jewellery or investing in gold. The widespread belief that “gold prices always rise” continues to drive demand.
This strong belief doesn't dissuade them from buying gold even when domestic prices rise on account of the government raising import duties. Therefore, there is unlikely to be any impact on consumers’ purchases of gold from the Prime Minister’s appeal to postpone gold purchases for one year or from raising import duties.
Pressure on the rupee is likely to slide relentlessly in the foreseeable future. The Rs 100 to a dollar ‘milestone or millstone’ is round the corner—and appears almost inevitable in 2026. What remains uncertain is not the direction of the rupee’s movement, but the speed of its decline.
(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)