“The level of reserves is also important from a market sensitivity point of view,” Patra wrote in an article on BasisPoint Insight. “Punting against such a level should be beyond the reach of the opportunistic and/or the faint-hearted.”
His remarks come at a time when India’s reserves have come under pressure as the central bank steps in to defend the rupee.
Also Read: India’s forex reserves fall $11.68 billion to $716.81 billion
Sharp fall in reserves amid rupee defence
India’s foreign exchange reserves fell sharply in the latest reported week. Reserve Bank of India data showed that reserves declined to $716.81 billion in the week through March 6, down from $728.49 billion in the previous week.
The $11.68 billion drop came as the central bank sold dollars aggressively to support the rupee, which has been under strain due to the Iran war and a surge in oil prices.
The fall marks the steepest weekly decline in over a year and reflects the growing pressure on external balances amid global uncertainty.Also Read: At 92.43/$, rupee almost makes a new all-time low
How the $1 trillion target is calculated
Patra said the $1 trillion reserve target is based on two key buffers that the RBI must maintain to safeguard the economy.
The first requirement is to ensure that reserves are sufficient to meet all one-year external debt obligations. Based on current estimates, this would amount to about $300 billion to $350 billion.
The second requirement is to provide a cushion against sudden and sustained outflows of foreign portfolio investment. According to Patra, reserves should cover at least 60-65% of the total stock of such investments at current market value.
He pointed out that portfolio outflows can be large and prolonged, as seen since 2022-23. A rough estimate suggests that this buffer would need to be in the range of $600 billion to $650 billion.
Taken together, these two components push the required reserve level to at least $1 trillion. Patra added that the final figure would also depend on how much of the reserves are held in liquid form for immediate intervention.
Building intervention capacity over time
Patra said the RBI must ensure it has both the resources and the staying power to intervene in currency markets when required.
This involves maintaining a continuous assessment of capital flows at risk and running simulations of adverse scenarios.
He said the build-up of reserves to the desired level could be achieved over a three-year period. This timeline aligns with the long-term trend in reserve money expansion, which has averaged $60 billion to $65 billion per year over the past two decades to meet domestic liquidity needs.
Managing liquidity and sterilisation challenges
As reserves rise, the RBI will need to manage the resulting liquidity in the banking system to remain aligned with its monetary policy stance.
Patra said sterilisation of around $35 billion annually could be carried out through the uncollateralised standing deposit facility to maintain price stability and ensure orderly financial markets.
He added that the standing deposit facility gives the RBI technically unlimited capacity to absorb excess liquidity. Other tools could also be used depending on evolving financial conditions.
Before leaving the RBI in early 2025, Patra oversaw a phase of strong reserve accumulation as the central bank absorbed global capital inflows.
In the later part of his tenure, the RBI deployed these reserves to contain currency volatility. This helped make the rupee one of the least volatile currencies globally, even as external shocks intensified.
His latest assessment points to the need for a significantly larger reserve buffer as India navigates a more uncertain global environment marked by geopolitical tensions and volatile capital flows.