Forex has helped avert a currency run, but continuous inflow has its risks

At a time when India is facing stagflation, its forex reserves have helped avert a currency crisis, but there are unintended consequences of accumulating forex. Manojit Saha explains the risks

From a low of $275 billion in September 2013, when the country had a run on its currency, India’s foreign exchange reserves have more than doubled in the past eight years to $605 billion. Only three countries in the world have substantially higher forex reserves than India – China, Japan, Switzerland. As on June 4, Russia’s and India’s reserves were at almost the same level; these could swing either way in the coming weeks and months.
 
Between 2014 and 2020, while India’s forex reserves grew in all years but one (2018), the year 2020 saw the highest build-up of