Budget 2025: A look at India's forex reserves at play amid rupee volatility

Finance Minister Nirmala Sitharaman presented the Union Budget for the fiscal year 2025-2026 in February 2025, marking her eighth budget under the Modi government.

As the government prepared for this mega financial event, examining key economic indicators such as foreign exchange reserves, the performance of the Indian rupee, and the global economic environment, including the policies of the Trump administration in the United States, were key.

As of January 24, 2025, India's foreign exchange reserves rose $5.5 billion at $629.55 billion.

This decrease follows a cumulative drop of nearly $75.3 billion from the record high of $704.89 billion observed on September 27, 2024. Furthermore, the reduction in reserves is attributed to the Reserve Bank of India's (RBI) interventions in the forex market to manage rupee volatility and changes in the valuation of foreign assets.

The Indian rupee has experienced significant depreciation against the U.S. dollar, recently breaching the 86 per dollar mark for the first time.

On December 19, 2024, the rupee reached a low of 85.0850, influenced by the U.S. Federal Reserve's indication of fewer rate cuts in the upcoming year, which has strengthened the dollar.

The rupee's decline is further exacerbated by reduced capital flows, a widening trade deficit, and slowing economic growth in India. The RBI has been actively intervening to curb excessive volatility in the currency market.

Foreign Portfolio Investors (FPIs) recorded net outflows of ₹81,903.7 crore ($9,491.6 million) in January, marking the highest monthly outflow since October 2024, when they withdrew ₹1.1 lakh crore ($13,556 million), according to NSDL data.

In the primary market, net investment by FPIs slowed to ₹3,877 crore ($448.7 million), the lowest in seven months, as weaker sentiment in the broader market led to reduced IPO activity.

Meanwhile, the global economic landscape has been notably influenced by the policies of the Trump administration in the United States. The administration's fiscal policies, including tax reforms and increased government spending, have contributed to a stronger U.S. dollar, impacting emerging market currencies like the Indian rupee.

Additionally, trade policies and geopolitical decisions have already introduced elements of uncertainty in global markets, affecting capital flows and investor sentiment worldwide.

In light of these economic factors, the forthcoming Union Budget is expected to focus on measures to stabilize the economy, attract foreign investment, and promote sustainable growth.

Strategies may include reforms in taxation, incentives for domestic and foreign investors, and policies aimed at enhancing economic resilience amidst global uncertainties.