Amid rising concerns in the wake of the Covid 19 induced uncertainty in the global markets, India's swelling foreign exchange reserves — currently at over $ 611 billion – serves as a sentiment booster. The quantum can easily take care of a large part of the external debt.

However, while high forex reserves act as a cushion and provide the necessary resilience, it also increases overall cost. The Reserve Bank of India (RBI), therefore needs to focus on efficiently managing the pile of reserves to ensure a healthy return.

In terms of forex reserves, India currently ranks fourth in the world. China has the highest reserves followed by Japan and Switzerland.

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A high forex reserves is an indicator of a country’s ability to meet external debt obligations besides being a sentiment booster. This is also important for credit rating agencies.

“While the magnitude of reserves is important, it is also equally important to manage it well so that it can give a better return,” DK Srivastava, chief policy adviser, EY India, told India Narrative.

“We must remember that there is also a cost attached to high reserves and we need to be watchful of that, it is important to have healthy forex reserves but unnecessary rise can lead to other problems and will also push the cost of maintaining such reserves,” an analyst added.

Srivastava said that RBI must monitor closely to ensure that returns on the pile of forex is healthy.

Earlier, brokerage firm Anand Rathi noted that though the high forex kitty provides resilience to India’s external sector position, a low (often less than 1 per cent) yield, can push up the cost of holding the reserves.

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The reserves have swollen steadily in the last one year due to the foreign direct investments, remittances and portfolio investments.

According to a report published by the Economic Times, the RBI “is weighing the option of engaging specialist money managers to help improve yields on the reserves fund as rates hit record lows globally.”

The forex kitty is determined by the level of foreign currency assets, and their appreciation or even depreciation. India’s forex kitty also has gold reserves and special drawing rights (SDRs).