In an eyelid-battling reversal of fortunes, India’s foreign exchange reserves have witnessed a sharp and closely watched decline, raising questions about global volatility and of course, currency pressure.
India’s FX reserves have dipped significantly this week after having hit record highs just two weeks prior.
Downfall is real, and is really concerning.
India’s Forex Reserves Fall $11.4 Billion to $698 Billion After Record $728 Billion Peak
According to Bank of India (SBI) data released today, Indian FX reserves fell for the second week in-a-row this week, dropping $11.413 billion from $709.577 billion to $698.346 billion over the week ending March 20, 2026. This is in addition to the $7.052 billion decline from the prior week. The scope of decline is even more telling when viewed in conjunction with peak reserves being achieved just two weeks before this downturn at $728.494 billion on February 27, 2026.
The timing of this dramatic downfall in reserves is notable relative to oh-so-widening tensions between the US and Iran that began around February 28th and may be adding to the FX volatility that has resulted from geopolitical disruptions in the Strait of Hormuz.
Is Gold No More A “Safe Haven?”
One of the more curious reasons for the drop in India’s FX reserves is gold.
Traditionally, gold has been a safe-haven investment in times of economic uncertainty; however, the validity of this premise was put to the test as Indian gold reserve levels fell by approximately $13.495 billion during the past week from $130.495 billion to $117.186 billion.
SIGH!
The current drop in gold prices corresponds to the global market environment where, in March 2026, an overall reduction of more than $1,000 per troy ounce occurred due to the large amount of margin call related selling taking place with large amounts of capital moving out of gold and into US dollar-denominated currencies.
The major cause for this change can be attributed to the US dollar strengthening during the last year, which was primarily due to the negative impact of continuing inflationary pressure on the ability of the United States’ Federal Reserve to lower interest rates, which allowed for the US dollar to remain an attractive asset. Consequently, cash did not normally flow into gold, which would normally occur during a time of world wide crisis, as it did during March 2026, but instead stayed with the US dollar.
This situation demonstrates a fact straightforwardly; the function of gold as a ‘safe haven’ is conditional, and regulated by many macroeconomic factors, such as interest rates, liquidity and the value of currencies.
The sudden attenuation of the gold holdings in India and globally (ie. their gold reserves fell) was accompanied with a significant increase in the FCA ( Foreign Currency Assets ) component of India’s forex reserves, adding $2.127 billion (or 253% increase ) to the dollar to reach $557.695 billion during the period.
The FCA had a $2.127 billion increase due to non-dollar currencies (ie. Euro, British Pound and Yen) appreciating, thus increasing the value of the FCA.
Overall, this represents that the modest increase in FCA did not offset the significant decrease in gold, reflecting that the overall forex (Foreign Exchange) reserves are particularly vulnerable to commodity price volatility.
There has also been a marginally altered amount concerning the components in India’s reserves directory other than those mentioned above. The following summarizes what had changed:
• Special drawing rights (SDRs) decreased $(65 million) and have settled at ‘$18.632 billion
• India’s reserve position with the international monetary fund (IMF) also had a slight increase of $(19 million) and was registered at ‘$4.833 billion.
Even though these fluctuations are relatively…hmm, tiny, they help create a bigger picture on how many different moving parts impact total reserves.
Rupee Falls Below ₹94/$ for First Time: Oil Prices, FPI Outflows & Currency Pressure
Along with a decreased reserve level’s existence, there is a noticeable amount of pressure on the Indian rupee. For the first time ever, the rupee actually dropped below the ₹94 mark ($1 = 94.7985 rupees as of March 27, 2026).
“Humara rupya theek chal raha hai” may be the biggest gaslighting of the century till now!
The depreciation of the rupee is not occurring in a vacuum; several variables exist:
• Rising crude oil prices are also occurring and Brent crude has moved over $110 a barrel,
• India’s dependence on oil imports,
• On-going geopolitical tension,
• The existence of considerable foreign portfolio investor (FPI) outflows exceeding $10 billion for the month of March.
RBI Injects ₹65,322 Crore Liquidity via Repo Auction to Stabilise Market
To mitigate pressure on liquidity and ensure stability upstream in the financial sector, the Reserve Bank of India injected ₹65,322 crore ($10 Billion at current rates) through a six-day- variable rate repo auction at 5.26%. This injection will mitigate tight liquidity resulting from advance tax and GST related outflows, but it will also indirectly support the rupee.Gold prices have decreased substantially and the amount of gold that central banks hold is likely to decline. Thus, both these elements would lead to a decline in Central Bank reserves, thereby having significant ramifications for the market and the value of the dollar.
Overall, we believe the recent decline does not negate the long-standing resilience of India’s external sector.
In the long term:
- In 2025, India’s forex reserves will increase by $56 billion.
- In 2023, India’s forex reserve will increase by $58 billion.
- In 2022, India’s forex reserve will recover from a $71 billion drop.
In addition, the Reserve Bank of India has stated that the current level of reserves is greater than 11-12 months of imports and therefore provides India with a reliable source of external funds, thereby enabling it to meet its financing needs.
Weekly price fluctuations have always been a feature of gold markets; however, they are typically moved frivolously by currency values and changes in valuation as opposed to structural accommodations and problems.
What’s Next for Gold? 4 Key Scenarios Investors Need to Watch
1. Gold will likely return to safe-haven status if geopolitical tensions escalate or global growth deteriorates, but it will be very selective!
If interest rates start to decline in major economies, gold can regain its safe-haven status if geopolitical tensions continue to escalate or the world economy deteriorates; if not, US dollar strength will continue to act as a barrier to demand for gold.
2. Dollar dominance, along with a rising rate of US interest rates and high inflation rates, is likely to maintain the downward pressure on gold.
Because US dollar-assets are typically preferred by investors compared to gold assets due to the high level of US interest rates and continued inflation in the US, demand for gold could be limited going forward as the US dollar provides relative stability in the global economy versus gold.
3. Continued purchases of gold by central banks may create long-term support for gold.
While central banks may reduce their purchases of gold in the short term due to the reduced value associated with the current bull market, continued purchases of gold by central banks, particularly in emerging markets, will continue to provide a strong foundation for the growth of gold demand over the long-term.
4. Increases in commodity volatility will make reserve levels increasingly sensitive to volatility in gold prices.
As demonstrated by the recent episode of extremely large price fluctuations in gold, the relationship between countries’ reserve levels and the price of gold is becoming increasingly complicated. Countries may need to consider reserve composition when establishing their reserves in order to mitigate/limit their exposure to changes in the price of gold.