RBI says diversification of forex reserves is most critical approach amid geopolitical risks
Mumbai: The Reserve Bank of India (RBI) said that diversification remains the most critical approach in managing the country's foreign exchange reserves against the backdrop of the 'weaponisation of reserves' during times of conflict.
In its 2024-25 report, the central bank highlighted the importance of 'spreading reserves across various currencies, asset classes, and jurisdictions' to mitigate risks arising from geopolitical conflicts and financial market shocks.
RBI's Department of External Investments and Operations reported a 3.4% increase in forex reserves during 2024-25, following an 11.7% rise the previous year. To strengthen resilience against volatility, the RBI continued exploring new asset classes and jurisdictions for deploying foreign currency assets, aligning its strategy with the three traditional objectives of 'safety, liquidity, and return.'
The report flagged the growing threat of the 'weaponisation of reserves,' where sanctions restrict access and usability of foreign assets, prompting RBI and other central banks to consider alternative strategies for reserve management.
Alongside diversification, RBI is promoting the internationalisation of the rupee to boost trade settlements in the Indian rupee, including through the Asian Clearing Union's Utkarsh 2.0 mechanism, aiming to reduce reliance on major currencies.
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Technology-driven innovations such as central bank digital currencies (CBDCs) and cryptocurrencies offer new opportunities but also challenges. While CBDCs can improve cross-border payments and settlement efficiency, cryptocurrencies pose risks due to their volatility and regulatory uncertainties.
Global reserve managers continue to balance liquidity and investment needs by holding liquid assets for immediate shocks while seeking higher returns through investment tranches.
Gold remained a favoured safe-haven asset, with central banks increasing holdings amid uncertainty. The majority of reserves are still invested in US dollar-denominated assets, reflecting the dollar's dominant global role, RBI said.
Sustainability is gaining focus in RBI's reserve management, with increasing integration of environmental, social, and governance (ESG) criteria to mitigate climate risks and future-proof assets.
As geopolitical tensions and economic uncertainties rise, RBI's diversified and forward-looking reserve management approach aims to enhance India's external sector resilience while embracing innovation and sustainability.
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