Why India’s war chest is under threat from a silent FDI drain

Subscribe to enjoy similar stories. New Delhi: India had $686 billion of foreign exchange (forex) reserves at the start of 2026. This number is often trotted out as evidence of the Indian economy’s external invulnerability.

It’s a long way from the 1991 crisis, when India’s forex reserves plunged to barely $1 billion. Faced with a situation in which forex reserves covered only about three weeks’ worth of essential imports, the Reserve Bank of India (RBI) was forced to pledge its gold with the Bank of England to raise a foreign currency loan. That set the stage for India’s economic reforms and opening up to foreign investment.

By 2004, India’s forex reserves had reached $100 billion, and have continued to grow in the following years. India now ranks consistently among the world’s top five countries for forex reserves. Yet, past crises have left a lasting impact: building up adequate reserves remains an integral part of RBI policy.

Each episode of market volatility has only made the central bank more determined to accumulate reserve assets. But it has been challenging to build reserves with the same momentum as before. The annual change in foreign exchange reserves has been negative only six times in the past 26 years.

Tellingly, three of those occasions occurred in the last four years, including the current one (see chart). Meanwhile, the Indian rupee continues to weaken, with the RBI walking the tightrope between managing excessive currency volatility while simultaneously accumulating reserves when possible. The lessons of 1991 and 2013 have been well learnt.