In recent years, sharp appreciation of the dollar and surge in gold prices have together helped deliver a substantial accretion to India’s forex reserves, adding billions without the central bank having to directly accumulate assets. In Q1 FY26, forex reserves have gone up by $29.8 billion; $25.3 billion or 85 per cent of this increase was due to valuation gains.
Valuation changes are a double-edged sword which can increase or decrease reserves sharply in a given period. For instance, valuation losses of $17.2 billion resulted in reducing the overall gain in forex reserves by that amount in FY22. But the valuation gains of $26.9 billion in FY25 helped increase the total reserves last fiscal year.
The valuation gain of $25.3 billion in the first quarter of this fiscal year is one of the highest quarterly gains in recent times.
Gold to rescue
The gains in the first quarter are mainly due to the increase in gold prices. The RBI has not added any gold to its reserves in the first quarter, with its gold holding remaining at 879 metric tonnes in this period.
The US dollar was weak in this period, with the dollar index sliding from 104 to 94 in the first quarter due to Trump’s policies. So, gains in US treasury securities could not have contributed to the valuation gains. The RBI had also net sold dollars worth $3.5 billion in this period.
But gold prices had rallied strongly in the first quarter due to the upheavals caused by the trade war. Between April and June 2025, international gold prices jumped 8 per cent, trading at over $3,274 per ounce towards the end of the quarter. At the same time, India’s total gold reserves rose by 8.6 per cent to $84.5 billion.
Every uptick in bullion translated into a swelling value of India’s holdings, automatically lifting the reserves. As a result, gold’s share in India’s total reserves has doubled from less than 6 per cent in 2021 to more than 12 per cent today. Overall, forex reserves have seen modest gains, from $651 billion towards the end of Q1 FY25 to $697 billion towards the end of Q1 FY26
Conscious choice
Vivek Iyer, Partner and Financial Services Risk Leader, Grant Thornton Bharat, said foreign exchange reserves have increased largely due to a conscious choice to hold a larger position of foreign exchange reserves from a financial stability perspective, with an increasing bias towards gold in recent times. Bullion has assumed importance primarily due to the high political risk associated with the US dollar; it is a trend that is not just unique to India but also applicable to many other advanced economies. As the status of the US is being eroded as a global hegemon, the preference for forex reserves moves to gold in the absence of another strong reserve currency.