India's net currency purchases rose to around $42 billion, or 1.8 percent of its gross domestic product, in the 12 months from July, 2016 to June, 2017, the Treasury said. Compared to the $10 billion, or 0.4 percent of GDP, net purchases in calendar year 2016, New Delhi has been on a buying spree.
"Over the first half of 2017, there has been a notable increase in the scale and persistence of India's net foreign exchange purchases," the Treasury said, adding that it will be "closely monitoring India's foreign exchange and macroeconomic policies."
The RBI intensified the buying of foreign currencies this year after a surge in capital inflows into India's stocks and bonds sent the rupee appreciating to its strongest in two years against the U.S. dollar. The purchases — to ensure the rupee does not rise to a level that would harm its exporters and other internationally operating firms — also saw India's foreign reserves hitting an all-time high of $402.51 billion in September.
Those currency moves could potentially lead to India's inclusion on the U.S. Treasury's manipulator watchlist, and so the RBI may be looking to pull back on its defense of a cheap rupee. That would see the Indian currency jump in relative value, which would cause negative effects for wide swaths of the economy.
And, if India feels limited in its ability to buy up international currencies, that will also affect its efforts to create robust foreign reserves that would protect against economic shocks.
That's something that New Delhi should be doing more of, according to Rajiv Biswas, APAC chief economist at IHS Markit. The country should increase its reserves "significantly further" as its current account deficit makes it particularly vulnerable in the event of a capital flight, he explained.
"Increased FX (foreign exchange) reserves help to reassure global financial markets that India is resilient to external shocks, particularly hot money outflows," Biswas said in an email. "FX reserves are essentially like a fire insurance policy — in good times you complain about the cost, but you only fully understand their value when markets are in meltdown and a currency crisis looms."