The country's foreign exchange reserves jumped $5.16 billion to a record high of $657.16 billion for the week ended July 5, according to the latest data from RBI released on Friday.
The reserves had dropped by $1.71 billion to $652 billion in the June 28 week but have now bounced back to continue their upward streak seen in the previous weeks.
This rise in foreign exchange reserves is indicative of strong economic fundamentals that would give the RBI better flexibility to iron out the rupee's volatility with greater ease.
A good amount of forex reserve will allow the RBI to intervene appropriately in both the spot and forward currency markets by selling more dollars to prevent any sharp depreciation of the rupee.
The reverse is also true—a falling forex reserve unwittingly limits the RBI's space to intervene and back the rupee with a certain degree of planlessness.
RBI Governor Shaktikanta Das has already said that India's external position is strong, and he was confident that the central bank would be able to meet its external financing requirements comfortably.
The current account deficit narrowed to USDbn (% of GDP) for -, from USDbn in the same quarter of FY—arguably as much a reflection of the contraction of the merchandise trade deficit—pointing to a very strong external balance position taken based on June, RBI data.
The RBI data also showed the current account balance of India witnessed a surplus of USD 5.7 billion during January-March quarter this year, against a deficit of USD 8.7 billion during October-December and deficits of USD – 1.3 billion in the case of the fourth quarter of 2022–23, thereby insinuating an improvement in macroeconomic conditions for the nation.
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