A Few Blind Men and the Elephant – Understanding India’s Predicament amidst the Iran War,

Background

Opinions about a situation, even the most objective ones, could differ depending on perceptions and purposes. The 19th-century poem "The Blind Men and the Elephant" by American John Godfrey Saxe, published in 1872, illustrates it beautifully.  India’s economy, much like the elephant, has many sides to see and even more sides to take. 

Let me place an elephant before the reader, who has the freedom of choosing inferences.

The rupee is sliding, and the price of cooking gas and fuel is climbing. The government says that the economy is in fine shape. The Government in power today is led by the party that held the reins of nationwide protests against the depreciation of the rupee from ₹54.30 on 31 Mar 2013 to ₹59.92 on 31 Mar 2014, a fall of 10.35% {(₹59.92 -₹54.30)/ ₹54.30%}.

The rupee breached ₹94 on 31 Mar 2026, recording a 55.21% fall from 2014 levels. In the last 13 years, the rupee has weakened by about 72% against the dollar. Similarly, fuel prices also increased. The celebrity faces of the 2013-14 protests have vanished in silence, and those who held the reins of protests then and of governance now say the rupee is stable. It is very reassuring to hear that when the world economy is looking ruffled.

Certainly, there has to be merit in studied silence and exhibition of confidence. Let us look at the elephant from different sides to make sense of the silence and noise and iron out the irony in an attempt to understand what is happening with the economy. 

This piece is data-heavy. You can read through in detail or skip the tables, just scanning them and reading the analysis.

This is also an attempt to demystify macroeconomics, simplify terminologies and make it friendly, so that you can evaluate the situation according to your tastes.  

The data used in the article is available in the public domain. There is enough data on the web. An AI-assisted search can give you a summary in any manner you want. A similar analysis can be done by you for your country or any country you want.

Recap

We ended the last article with a list of things that go towards making India’s forex reserves. There were several terminologies used. I had promised that we would walk through these to understand them and see how they impact the economy.

India’s foreign exchange reserves come in the form of: -

·       Foreign Currency Assets (FCA).

·       Gold Reserves.

·       Special Drawing Rights (SDRs).

·       Reserve Tranche Position (RTP) with IMF.

Now, let us examine each element.

FCA 

FCA is the largest component of India’s foreign exchange reserves, held by the Reserve Bank of India. It is just as the name suggests, it is India’s assets held in foreign currencies.

How do we get FCA? There are two inflow streams, viz., Current Account and Capital Account.

Current Account

The accruals here do not create liabilities. That means this doesn’t have to be returned. These include income from exports of goods & services, remittances (NRI transfers) and receipts (interest, dividends). 

Table – 1

Current Account Inflows (2010–2026)

(USD Billion Approximated)

 

Year	Exports (Goods + Services)	As %	Remittances (NRI Transfers)	As %	Receipts (Interest, Dividends)	As %
2010	275	81.12	55	16.22	9	2.65
2011	330	81.89	63	15.63	10	2.48
2012	325	80.05	70	17.24	11	2.71
2013	330	80.49	69	16.83	11	2.68
2014	345	80.80	70	16.39	12	2.81
2015	310	79.28	69	17.65	12	3.07
2016	305	80.47	63	16.62	11	2.90
2017	340	81.53	65	15.59	12	2.88
2018	390	82.63	69	14.62	13	2.75
2019	395	80.28	83	16.87	14	2.85
2020	370	79.40	83	17.81	13	2.79
2021	480	82.19	89	15.24	15	2.57
2022	670	85.03	100	12.69	18	2.28
2023	700	84.24	111	13.36	20	2.41
2024	735	83.81	120	13.68	22	2.51
2025	760	83.61	125	13.75	24	2.64
2026	800	83.77	130	13.61	25	2.62

 

It is clear that inflows have grown over a period, and exports remain the predominant factor, hovering above 80%. You would also notice the declining trend for NRI transfers post 2020 and the increasing trend in interest and dividend receipts. While remittance in absolute terms may be increasing, as a share of the current account, it is depleting.

Capital Account 

The bulk of FCA comes from the capital account. This is actually a liability because it has to be returned. This includes: 

FDI (Foreign Direct Investment) when foreign business entities make investments, like in infrastructure, factories, etc

FPI (Foreign Portfolio Investment / FIIs) when foreign governments or institutional investors buy Indian stocks or bonds.

External Commercial Borrowings (ECB). This includes ALL borrowings by the Government of India, State governments, Indian companies and Banks.

Banking Capital. This money comes into India through the banking system. When foreign banks operating in India bring in foreign funds, or when Indian banks borrow from foreign banks, there is an influx of banking capital. However, the chunk comes from Indians living abroad. They deposit money in Indian banks through Foreign Currency Non-Resident (FCNR), where money is deposited in a foreign currency and taken back in that currency with interest or through Non-Resident External (NRE), where money is deposited in Rupee but fully repatriable as foreign currency at the exchange rate then.

Short-term Trade Credit & External assistance. These are short-term loans or credit, which are delayed payment facilities extended by foreign suppliers to Indian importers. The amount considered as short-term external borrowing gets added into FCA for that period, but gets debited while being paid in foreign currency. External Assistance is an aid often given to India by foreign governments or agencies like the World Bank, the Asian Development Bank or the IMF.

 

Table - 2

Capital Account Inflows (2010–2026)

(USD Billion Approximated)

 

Year	FDI	As %	FPI / FII	As %	Ext Borrow	As %	Banking Capital	As %	Credit & Ext Assistance	As %
2010	25	26.32	32	33.68	18	18.95	12	12.63	8	8.42
2011	36	38.71	18	19.35	20	21.51	10	10.75	9	9.68
2012	34	35.42	26	27.08	17	17.71	11	11.46	8	8.33
2013	28	32.94	20	23.53	15	17.65	15	17.65	7	8.24
2014	34	28.57	42	35.29	16	13.45	18	15.13	9	7.56
2015	44	50.57	5	5.75	10	11.49	20	22.99	8	9.20
2016	60	56.60	8	7.55	9	8.49	22	20.75	7	6.60
2017	60	47.62	30	23.81	12	9.52	14	11.11	10	7.94
2018	62	59.05	4	3.81	18	17.14	9	8.57	12	11.43
2019	74	59.20	14	11.20	20	16.00	6	4.80	11	8.80
2020	82	61.65	24	18.05	11	8.27	7	5.26	9	6.77
2021	81	55.86	38	26.21	9	6.21	5	3.45	12	8.28
2022	71	86.59	-16	-19.51	7	8.54	6	7.32	14	17.07
2023	71	52.99	22	16.42	15	11.19	10	7.46	16	11.94
2024	75	47.47	35	22.15	18	11.39	12	7.59	18	11.39
2025	80	45.98	40	22.99	20	11.49	14	8.05	20	11.49
2026	85	44.97	45	23.81	22	11.64	15	7.94	22	11.64

Figures for 2026 are projections

A close look at the table will reveal that FDI and FPI together dictate the health of the capital account and therefore the FCA. Each element, in absolute terms, has shown a consistent increase. However, if you look closely, you will see that the share of FDI in the capital account has increased tremendously, while FPI/FII decreased from 33.68% in 2010 to 22.99% in 2025. A similar decrease is seen in Banking capital. Simply put together FDI became the favoured route. Is there a reason? One thing is certain: A flight of capital from the two heads can wreak havoc with FCA.

Holding FCA

FCA can be kept as cash or invested. It can even be stored in kind, like gold. The government just needs to buy gold and keep it. However, if it is converted to gold, it is no longer counted as FCA but is accounted for as foreign exchange reserves.

To understand it more easily, imagine your own wealth. You earn money. You can keep it in the wallet as cash to spend, buy gold or property or invest it. The wallet meets your daily living needs, whereas the investments give you returns that you can add to the kitty or spend. Property can be used, put to earn or be sold in times of need because it has liquidity. Gold gives you a sense of security on a rainy day.

The cash in your wallet could be of various denominations of different currencies stacked inside. What you earn in different currencies, you store it as such in your wallet. When you buy anything there, you pay in their currency. Now, you don't need all the currencies of the world in your wallet. You will choose the currency you think will be better to hold. This is exactly what the Reserve Bank of India (RBI) does for India.  FCA is India’s wallet held with the RBI. They store the money in dollars, euros, pounds, and yen, and may be a few other currencies.

The exact constitution of the FCA holding is normally not made public for obvious reasons.  Most countries hold their FCA mostly in dollars. The pattern of India’s FCA holdings over the period 2010-26, as available from the public domain, is given below: -

 

Table - 3

FCA Holdings (2010–2026)

 

Year	USD %	Euro %	GBP %	Yen %	Others %
2010	63%	15%	8%	10%	4%
2012	65%	15%	7%	9%	4%
2014	68%	15%	6%	7%	4%
2016	71%	15%	4%	6%	4%
2018	72%	14%	4%	5%	5%
2020	75%	13%	4%	5%	3%
2022	76%	13%	4%	5%	2%
2024	77%	13%	3%	4%	3%
2026	~77%	~13%	~3%	~4%	~3

 

What is visible straightaway is that India’s FCA is dollar-predominant, and the dominance has grown over time through a visible shift in favour of the dollar. Wisdom warns against putting all or most eggs in one basket. The government would have some reasons for the gravitation to the dollar.

Investments. A sovereign central bank like the RBI could invest in Foreign government bonds (like US Treasury bonds), maintain deposits with other central banks, as we do with our fixed deposits and even buy securities. These are all diversified forms of holding liquidity. To get a better picture, we will see it as consolidated percentages, not in absolute terms. How India’s holdings have evolved over time is given in Table 4.

 

Table - 4

FCA Investments (%)

 

Year	Securities	CB/BIS* Deposits %	Commercial Bank Deposits %	Others %
2010	73%	15%	8%	4%
2012	75%	14%	7%	4%
2014	77%	12%	7%	4%
2016	79%	9%	6%	6%
2018	80%	7%	6%	7%
2020	83%	7%	5%	5%
2022	83%	6%	5%	6%
2024	84%	5%	4%	7%
2026	~84%	~5%	~4%	~7%

 

*BIS is the Bank for International Settlements. It is the bank for all the central banks.

If you notice, India has reduced conventional deposits heavily in favour of securities like the US Treasury bonds, Eurozone sovereign bonds, UK gilts, and Japanese government bonds. It is essentially a policy decision. How much did each of these get? Let us see.

Table - 5

RBI’s Securities Portfolio

(Different Investments Estimated %)

 

Year	USA (Treasuries)	Eurozone (Germany, France, etc.)	UK	Japan	Others (Canada, Australia, BIS, etc.)
2010	45%	30%	10%	5%	10%
2012	48%	28%	10%	5%	9%
2014	50%	27%	9%	5%	9%
2016	52%	25%	9%	5%	9%
2018	55%	23%	8%	5%	9%
2020	58%	21%	8%	5%	8%
2021	62%	18%	7%	5%	8%
2022	65%	16%	6%	5%	8%
2023	68%	14%	6%	4%	8%
2024	70%	13%	5%	4%	8%
2025	66%	14%	5%	4%	11%
2026	~63%	~15%	~5%	~4%	~13%

 

The pronounced shift towards the dollar away from the eurozone and the UK is evident.  However, the sudden change in direction is visible in 2025. How does this get reflected in absolute terms during this period?

Table – 6

India's Investment in US Treasuries

(Estimated)

 

Year	US Treasury Holdings ($ Bn)
2010	135
2011	145
2012	160
2013	175
2014	190
2015	195
2016	205
2017	230
2018	240
2019	260
2020	290
2021	310
2022	230
2023	200
2024	235
2025	183
2026	~185–195

 

Are Tables 5 and 6 indicators of foreign policy changes? What triggered this abrupt change?  That is beyond the purview of this discussion.

Now, let us look at the other elements that constitute India’s foreign exchange reserves.

All About Gold

Gold is an important component of the forex reserve after the FCA. The value of the gold held is not part of the FCA. Gold is the ultimate asset for the RBI and is used in times of crisis, especially when forex holdings go critically low. Gold helps reduce both currency and geopolitical risks. The gold is physically held as bars and is stored in RBI vaults in India and other locations like Bank of England / BIS vaults abroad.

Saviour Gold

Gold holdings have saved India in the past, just like it does in times of household crisis. In 1991, India was faced with a severe depletion in its Foreign Exchange Reserves. It was left with $1–1.2 billion, just enough to barely cover imports for 2–3 weeks. The Gulf War had spiked Oil prices, NRI started withdrawing their deposits and Moody’s as well as Standard & Poor’s downgraded India’s creditworthiness.

In May 1991, the Government of India, through RBI, routed ~20 tonnes of gold through State Bank of India, sold/pledged to Union Bank of Switzerland with a repurchase agreement and raised ~$200 million. It was physically moved to Switzerland. In July 1991, the Reserve Bank of India pledged and physically moved 46.9 tonnes of gold and placed it with the Bank of England and raised another ~ $400–405 million. It was also with a buyback agreement. The two transactions helped India avoid a sovereign default. However, by November-December 1991, India repaid the emergency loans and brought back the gold. The economic reforms initiated under P. V. Narasimha Rao and the stabilisation steps led by Manmohan Singh led to the quick recovery. This incident is considered to have triggered India’s economic liberalisation.

It will be Interesting to see how gold has grown in its role as stabiliser in India's Forex reserves. 

Table - 7

Gold versus FCA in India’s Forex

 

Year	Total Forex Reserves ($ Bn)	FCA ($ Bn)	FCA (%)	Gold ($ Bn)	Gold As % of Total
2010	279	255	91.40	17	6.09
2013	292	259	88.70	21	7.19
2016	360	336	93.33	20	5.56
2019	412	382	92.72	27	6.55
2020	476	439	92.23	36	7.56
2022	563	500	88.81	40	7.10
2024	645	570	88.37	55	8.53
2026*	728	573	78.71	63	8.65

Figures are all Approximate and picked up from the web.

 

India is deliberately reducing risk by holding less in currencies in favour of solid assets. In a world where unpredictable temperamental leaders dictate world events through whimsical sanctions and tariffs, gold becomes the best bet for economic stability.  An increase in the price of gold increases the percentage of gold holdings, but that is notional. Gold, however, cannot do away with FCA. It will still be required for trade. 

I had actually warned in the beginning about the elephant! 

Table 7 clearly says we are reducing currency holdings (as %) in favour of gold. Now look at Table 3, which says India has reduced conventional deposits heavily in favour of securities and the tables after that, which show a heavy sway towards dollars and then a sudden change of mind. Most of the liquidity India’s FCA has gravitated into dollar holdings. Holding dollars must logically be better for us!

Without losing the thread, let us see how the rupee fared against the dollar, euro and pound during the same time period we have been considering so far.

Table - 8

Rupee per Unit of Foreign Currency

(At the end of the fiscal year)

 

Year	USD	% YoY Change	% Change from 2010	GBP	% YoY Change	% Change from 2010	EUR	% YoY Change	% Change from 2010
2010	45			68			61
2011	44.6	-0.89	-0.89	71.5	5.15	5.15	63	3.28	3.28
2012	51.2	14.80	13.78	81.5	13.99	19.85	68.5	8.73	12.30
2013	54.4	6.25	20.89	82.5	1.23	21.32	70	2.19	14.75
2014	60.1	10.48	33.56	100	21.21	47.06	83	18.57	36.07
2015	62.6	4.16	39.11	92.5	-7.50	36.03	67.5	-18.67	10.66
2016	66.3	5.91	47.33	95	2.70	39.71	75	11.11	22.95
2017	64.9	-2.11	44.22	81	-14.74	19.12	69	-8.00	13.11
2018	65.2	0.46	44.89	92	13.58	35.29	80	15.94	31.15
2019	69.2	6.13	53.78	90.5	-1.63	33.09	78	-2.50	27.87
2020	75.5	9.10	67.78	93	2.76	36.76	83	6.41	36.07
2021	73.3	-2.91	62.89	101	8.60	48.53	86	3.61	40.98
2022	75.8	3.41	68.44	99.5	-1.49	46.32	84	-2.33	37.70
2023	82.2	8.44	82.67	101.5	2.01	49.26	89	5.95	45.90
2024	83.4	1.46	85.33	105	3.45	54.41	90	1.12	47.54
2025	86.5	3.72	92.22	109	3.81	60.29	94	4.44	54.10
2026*	94	8.67	108.89	119	9.17	75.00	102	8.51	67.21

 

Let us understand the Table. The (-) signs show rupee appreciation against the currency. The YOY change is in comparison to the preceding year, and the other percentage indicates how much the rupee has depreciated or appreciated against that currency compared to the 2010 value.

Reading the Table. In 2010, one dollar traded for 45 rupees and in 2014, at 60.1. It had fallen by 10.48% from 2013. In 2020, it was 75.5, depreciating by 9.10% compared to 2019 and 67.78 compared to 2010. Now it is well past 94, depreciated by 8.67 from 2025 and a whopping 108.89% compared to 2010. However, compared to 31 Mar 2014, the rupee has depreciated 56.41% against the dollar.

To complete the picture, we must see how these three currencies, the dollar, the pound and the euro behaved with each other.

Table - 9

Dollar, Euro, and Pound Relationship

 

(USD per 1 EUR and USD per 1 GBP)
Year	USD / EUR	USD / GBP
2010	1.33	1.52
2011	1.41	1.6
2012	1.33	1.6
2013	1.28	1.52
2014	1.38	1.66
2015	1.08	1.48
2016	1.14	1.44
2017	1.07	1.25
2018	1.23	1.4
2019	1.12	1.3
2020	1.1	1.24
2021	1.17	1.38
2022	1.11	1.31
2023	1.09	1.24
2024	1.08	1.26
2025	1.06	1.22
2026*	~1.03–1.05	~1.20–1.22

 

The story is starkly different. The dollar has depreciated against both the Euro and the Pound. When the FM says the rupee is not weak, but the dollar is getting stronger, she is very right. However, the facts available in the public domain point to the US dollar weakening against the Euro and the Pound. 

Is the rupee chasing dollars, making the dollar stronger?

Back to gold once again.

Do other countries hold gold like India?

Yes. India is ranked only eighth in the quantity of gold held. The USA is said to hold ~ 8133 tonnes of gold.  Germany holds ~3350 tonnes, Italy ~2450 tonnes, France ~2430 tonnes, Russia ~2330 tonnes, China   ~2300 tonnes, and India about ~880 tonnes.

Is the gold held by the Indian citizen part of the forest reserves?

The huge gold stock, upwards of ~25,000+ tonnes privately held by individuals, households, temples and investors, is NOT part of forex. It will become a part only if the RBI acquires it.

Special Drawing Rights

SDR, the next element of foreign exchange reserves, is a basket of 5 currencies, the US Dollar, the Euro, the Chinese Yuan, the Japanese Yen and the British Pound, created by the IMF. This serves as an international reserve asset and is considered an asset in forex reserves. This can be exchanged for real currency (USD, EUR, etc.) with another country to meet balance-of-payments contingencies. To make it simple, it is like a credit card with a pre-approved withdrawal /usage up to a given limit. In 2021, post covid pandemic, the International Monetary Fund made a one-time record global allocation of about $650 billion worth of SDRs to all member countries. India’s share in the allocation was 2.6–2.8% of the total. Thus, India received about $18B. SDR is not day-to-day usable money but a credit line from the world system to tide over fiscal adversities.

Reserve Tranche Position (RTP)

The RTP is the portion of a country’s money at the IMF that the country can withdraw anytime without conditions. It arises by virtue of a country joining the International Monetary Fund, paying a quota subscription. The RTP has two parts, ~25% in reserve assets (SDR / USD / gold) and ~75% in local currency (for India, INR). The current position for India is ~$4.8B. It is like ~$4.8B with the IMF, that RBI can withdraw at any time. Utilisation of SDR and RTP by a country indicates extreme stress in its economy.

Now that we have seen what builds India’s foreign exchange reserves, why does a country need foreign exchange reserves?

Simply put, to buy stuff from abroad. 

All that a country imports, like Crude oil, Gas, Fertilizers, arms, ammunition, defence acquisition and everything else, gets paid from the forex wallet. The bigger and thicker the wallet, the better considered the holder! Like in the market, people with thick wallets get better consideration. No one is worried about how you made that money. Oney begets money. So, if your forex wallet is big, you attract more foreign money. That means more foreign direct investment.

The actual workhorse is the FCA.  It dictates how well the country can respond to geopolitical demands. India's forex Reserves (week ending 27 Feb 2026) were ~$728.49 billion. The FCA component was ~$573.1 billion or ~78–79% of total reserves. Gold (~$130B), SDRs (~$18.8B) and IMF reserve position (~$4.8B) made up the balance.

If you glance at the share of gold, it will be clear that India had moved to hedge gold for safety right from 2010. Even at the height of the oil shock, in 2013, India managed to push up gold stocks. However, the share of gold fell after that. It doesn’t mean that we sold gold, but we started pushing more for liquidity.

We have seen some part of the elephant today. We will explore more in the next article. The Indian economy is not just about forex holdings. There is much more. 

We will gradually build up to get a grip on understanding how we would be affected by the Iran war.