Is there a twist in India’s foreign exchange diversification tale? An International Monetary Fund (IMF) paper in 2022 identified India as among the major countries diversifying its forex reserves to non-traditional currencies. At 10% of its reserves, India’s share of non-traditional currencies was at the same level as those of Germany and Switzerland, but below those of Indonesia, South Africa and France. By the latest count, India’s forex reserves stood at $729 billion.
Foreign currency assets (FCA) made up 81.1% of these and gold 16.7%. Note that FCA includes foreign currency investments in Treasury bonds and the like, as well as deposits denominated in mainstream currencies such as the dollar, euro, pound and yen, plus others such as those of Australia, Canada and Sweden. Between March and August, India’s forex reserves increased by 5.5% and its FCA by 7%.
The Reserve Bank of India (RBI), like many Asian central banks, does not publish currency-wise forex positions. However, it may be assumed that the FCA increase was driven by dollar-denominated deposits by overseas Indians made with banks in the country to benefit from the special incentives on offer.
India’s FCA fell from 94% of reserves in 2017 to 80% in March 2026, the lowest in 30 years, before rising to just over 81%. The concentration of dollars in India’s reserves may have increased. The numbers suggest a detour from diversification.
One hopes that RBI does not move away from its diversification agenda in the hope of supporting the rupee. Globally, most central banks, including of America’s closest allies, are diversifying away from the dollar.
While the greenback will remain dominant, US debt is no longer risk free; major global rating agencies do not consider it AAA level. Arguably, in an extreme global crisis, a diversified reserve base may be more beneficial than over-dependence on any single currency.
Who is eating into the dollar’s share of reserves? In 2001, the dollar constituted 71.5% of the global reserves of central banks . This share fell to 57.1% by the first quarter of 2026 (IMF: Currency Composition of Official Foreign Exchange Reserves).
Mainstream currencies, however, have not taken the dollar’s share. The euro falters to deceive. In 2001, it formed 18% of global reserves and surged to 27.7% by 2009 before retreating to 20% currently. Likewise, the yen’s share has fluctuated between 4% and 6% since 2000.
The pound has done surprisingly well with a slice of about 4%. It is the non-mainstream currencies that have gained prominence in global reserves. They have grown from 2% in 2000 to 13% currently.
Drivers of forex reserve composition: The ratio of FCA vis-à-vis gold and share of dollar holdings within FCA are mainly driven by two factors. One, the need for dollar liquidity; and two, a country’s integration with the US, financially and geopolitically. High integration with the US financial system explains the high dollar holdings of the UAE and South Korea, for example.
Meanwhile, Türkiye, despite being a net importer with a structural need for dollar liquidity, keeps over half of its reserves in gold for geopolitical considerations. Germany, France and Italy, all net exporters and thus with limited dollar needs, have traditionally held large gold reserves. Gold’s share of their reserves have climbed from 60% to 80% over the last decade.
India, being a net importer, needs ample dollars for imports. Its integration with the US financial system is at best moderate and it is geopolitically positive to neutral in this context. So, while it needs dollar liquidity, it must diversify too.
This is not a de-dollarization drive but aimed at managing global financial market risks. Some of the US’s closest allies have among the highest gold holdings or lowest dollar holdings.
Although RBI has successfully guided India through forex turmoil, some further considerations may be noteworthy.
Coverage re-map: India has moved way ahead of its 1991 balance-of-payments crisis days. Thus, high forex reserves need not make for a victory parade. They come with a cost and have diminishing marginal utility. We should stop looking at reserves as a cover for a varying number of months of imports.
Let’s look at them as a buffer for net imports, should India suffer the stress of, say, imports staying unchanged as exports fall. Of course, a scenario of zero exports is very unlikely. Calculations indicate that while India’s forex reserves currently cover about 11-12 months of imports, an examination of net imports would stretch that to 15-18 months.
Also, we should highlight the level of forex diversification. Over-dependence on a single currency in this era of uncertainty is a risk bigger than an export slowdown.
Calibrated strategic execution: Maybe India should aim to reduce its concentration risk of major currencies by 0.5 to 1 percentage point under normal circumstances, and increase its share of currencies of countries with AAA and AA+ ratings, and step up gold-buying in a calibrated manner.
In the last 10 years, China, Russia and Türkiye may have been lucky to buy more than 60% of their purchases before 2018, when India began to buy gold. These countries may therefore have benefitted much more from the recent gold-price rally.
While shock-driven reactive measures such as raising foreign currency deposits are understandable, we must not distort the country’s underlying reserve diversification effort. A break in the momentum of that exercise on account of short-term pressures only reduces India’s resilience against an extreme global crisis.
The author is a risk management and AI consultant, and a member of the visiting faculty, IIM Ahmedabad and IIM Calcutta.