RBI has a plan to keep India's foreign exchange reserves safe from external shocks

The Reserve Bank of India ( RBI) is fortifying its foreign exchange reserves against geopolitical risks by diversifying its assets across currencies, asset classes, and jurisdictions, even as its balance sheet grew by 8.2 per cent to Rs 76 lakh crore in FY25.

This move comes as the central bank addresses concerns over the "weaponisation of reserves", ToI reported on May 30 based on the central bank's annual report released a day earlier. The RBI is aiming to insulate the Indian economy from external shocks, while also focusing on domestic data protection through the development of its own cloud services and promoting the international use of the rupee.

The RBI projects the Indian economy to grow at 6.5 per cent in 2025-26 with an inflation target of 4 per cent.

RBI is actively working to build "immunity" into its foreign exchange reserves, which constitute over 74 per cent of its assets. The central bank is concerned about the increasing use of financial sanctions to freeze or restrict a country's foreign-held assets during geopolitical conflicts, a phenomenon it terms the "weaponisation of reserves".

The increasing frequency of such measures has prompted central banks, including India's, to reassess the structure, diversification, and safeguarding of their external holdings.

To mitigate these risks, the RBI is prioritising diversification, which it considers the "most critical" approach to ensuring safety, liquidity, and return. This strategy involves spreading investments across various asset classes, currencies, and jurisdictions.

Currently, a significant portion of India's foreign exchange reserves is held in dollar assets, particularly US Treasuries.

According to RBI, diversification remains the most important way to manage risks linked to global conflict and financial market shocks.

In the past year, India's forex reserves grew by 3.4 per cent to $668 billion, following an 11.7 per cent rise the year before.

RBI's annual report for FY25 highlights ongoing efforts to insulate the economy from the vagaries of external influences.

The central bank expects the Indian economy to grow by 6.5 per cent in 2025-26, maintaining its position as the fastest-growing major economy. Inflation is projected at 4 per cent.

While RBI flagged uncertainty arising from changes in global trade and tariff policies, it said India's trade deficit remains manageable.

To safeguard domestic financial data, which has been targeted by cyberattacks, the RBI plans to launch its own cloud services in 2025-26 through phase I of the Indian Financial Services (IFS) Cloud.