India's slow climb to $500-billion foreign exchange reserves fortune

India’s foreign exchange reserves have crossed $500 billion, and RBI in the recent past has been one of the top gold-buying central banks in the world, including purchase of 200 tonnes of gold from the International Monetary Fund (IMF). 

But this has not always been the case. 

The country was forced to sell its gold in early 1991 to raise emergency funding from the IMF. 

The government took the path of liberalisation and foreign reserves started flowing in, initially in the form of foreign direct investment in the telecom sector. In early 2000, the central bank decided it would try to keep 12 months of import cover as its foreign exchange reserve. 

The reserves started rising after this. The present level is a sustained effort by the central bank to absorb all dollar inflows, even while keeping the rupee relatively stable. In recent days, the reserves have shown some resilience in the face of large outflows, and, therefore, the theory that most reserves could vanish with portfolio outflows has proven to be not entirely correct.