Forex Reserves at 500 Billion US Dollars

June 2020 is historic for India as the foreign exchange reserves with the reserve bank of India went past the mark of 500 billion US dollars. It is one hundred times the amount RBI held forty years back when India suffered the worst sovereign debt crisis.

What is meant by forex reserves?

They are made up of

Foreign currencies like US dollar
Gold
Special Drawing Rights of the International Monetary Fund
Certain amount of foreign currency held with the IMF as a security deposit called reserve tranche

Why do we need them?

We need them for a variety of reasons like

Service the external debt
Finance imports for food and energy security
Build confidence for the external investors and creditors that there is no risk for their commitments
Enter the market for stability of rupee in its external value
Use it as a base for printing rupee for economic growth
To help issue sovereign bond at a reasonable rate
It also brings good ratings for the economy and thus establishes a virtuous cycle

How is it that when the economy is in a depression mode, forex build-up is taking place at an unprecedented level?

Yes, the economy is contracting. On June 1, Moody’s cut the nation’s rating to the lowest investment grade. Remittances from the Indian diaspora declined due to global economic devastation. However,

Expectations from the Indian economy are high.
Economic reforms are in the pipeline to attract foreign capital like the corporate tax reforms in September 2019.
Reliance sold a significant part of its Jio Platforms for about 14 billion dollars.
RBI has been accumulating forex.
Crude prices have fallen making the imports cost less. thus creating forex savings.

Why is the Rupee falling then?

Yes, rupee fell all the way down to almost Rs.77 for a dollar. Its performance is sub-par. That is because,

The value of the rupee is the net effect of global confidence.
In fact, cheaper rupee is one of the reasons for the higher inflows as each dollar fetches more in rupees. So, RBI bought dollars and cheapened the rupee, intentionally or otherwise.