• India's forex reserves have decreased by $3.46 billion, settling at $684.8 billion, while gold reserves have increased by $1.08 billion to $68.53 billion.
• The surge in gold buying is attributed to geopolitical tensions, acting as a hedge against US economic sanctions and inflation.
• India's forex reserves are projected to grow, boosting its economic growth trajectory by attracting foreign investments and promoting domestic trade.
• Despite global economic uncertainty, the increase in gold reserves and projected growth of forex reserves are positive indicators of India's economic strength.

In the face of persistent stock market sell-offs by foreign institutional investors (FII) and escalating geopolitical tensions, India's foreign exchange reserves have seen a $3.46 billion decrease, settling at $684.8 billion for the week ending October 25, according to data released by the Reserve Bank of India (RBI). This comes despite the country's forex reserves having soared to an all-time high of $704.885 billion at the end of September, placing India fourth globally in terms of forex reserves size, trailing only China, Japan, and Switzerland.

Interestingly, while the forex reserves have dipped, gold reserves, which form part of the foreign exchange kitty, have seen an increase of $1.08 billion, reaching $68.53 billion during the same week. This surge in gold buying is attributed to the ongoing geopolitical tensions, with industry experts noting that gold is now acting as a hedge against US economic sanctions, traditionally being a safe haven asset and a hedge against inflation. Despite moderated inflation, gold has rallied to new highs, with the share of gold in the country's forex reserves surging more than 210 per cent since 2018.

The country's forex reserves have overall increased by $38.39 billion in the current financial year, which is sufficient to cover imports for 11.2 months based on the balance of payments, according to the RBI. This reflects the strong macroeconomic fundamentals of the economy.

India's Economic Outlook Amid Global Challenges

Looking ahead, India's forex reserves are projected to grow, and the strong forex will boost its economic growth trajectory by strengthening its position internationally, drawing in foreign investments, and promoting domestic trade and industry. The changes in foreign currency assets result from the central bank's actions in the forex market and fluctuations in the value of foreign assets within the reserves. According to experts, the bullion is likely to close this week in positive, amid support from safe demand, ETF buying, uncertain US election outcome, and rising bets for aggressive rate cuts from global central banks.

In the broader economic landscape, the London Bullion Market Association (LBMA), an international market established in 1987, deals with gold and silver bullion. LBMA's standard gold guidance system is based on the Organisation for Economic Co-operation and Development's (OECD) Due Diligence Guidance-a framework curating gold refineries, auditing, conflict-free metal sourcing and other aspects that impact gold prices. The quality provided by the LBMA is considered an international standard for the exchange of gold and silver. London Bullion Exchange's Over-The-Counter (OTC) market sets the price of precious metals.

The Indian banking sector has seen a significant credit boom in the years leading up to 2014-15 reforms. According to the RBI, the aggregate gross advances of Public Sector Banks (PSBs) surged from ₹18,19,074 crore on March 31, 2008, to ₹52,15,920 crore by March 31, 2014-a remarkable increase of 186%. However, the soundness of these bets ultimately hinges on the borrowers' ability to repay. When loans go unpaid for an extended period, they turn into bad loans or Non-Performing Assets (NPAs).

Global Economic Landscape and India's Position

Inflation was driven by a sudden spike in crude oil prices, which had surged past $120 per barrel, impacting economies worldwide. The resultant sharp depreciation of the Rupee, sluggish economic growth, and high inflation compounded the problem. This was a hurdle for the new government's ambitious plans for revitalising the economy which required substantial financing, which was to come from banks. Therefore, rebuilding the banking sector was essential not only for stabilizing the financial system but also for supporting overall economic growth.

The economic outlook for 2024 looks sedate. The good news is that inflation-and in particular, core inflation-slowed more than expected, energy-related risks seem to be less pronounced than a year ago, and labor markets are still quite robust. The latest Deloitte European CFO Survey26 showed that hiring expectations in the euro area have softened but the net balance is still slightly positive indicating a minor expansion over the coming year.

Altogether, economic activity should remain relatively weak at the beginning of 2024 and gradually pick up over the course of the year, as inflation comes down and tight monetary policy starts to ease. Private consumption will likely be supported by still robust labor markets, increasing real incomes, and lower saving rates as interest rates come down. Also, NextGen EU funds should underpin investment moderately. Export activity is expected to recover modestly as world trade growth is expected to rebound in 2024 to 2.7% from 1.1% in 2023.