India’s $800-bn reserves look strong but is temporary: BNP Paribas

New business data points to the fact that India's foreign exchange reserves have risen to around $800 billion, but BNP Paribas says the gain rests on reversible inflows. Foreign market participants have started selling again, and key expansion indicators are weakening.

In its latest India strategy note, the broker says around $127 billion of FCNR deposits has lifted reserves and pushed deposit expansion up to 17.6%. Credit expansion is at 19.5%. BNP Paribas warns that these flows are likely to reverse within 3-5 years.

The warning comes as markets are already under pressure:

– The indian rupee has fallen more than 1% in two weeks.

– India's 10-year yield has crossed 7%.

– FIIs are net sellers again.

– The India-US yield gap has narrowed by around 40 basis points since June, making Indian assets less attractive.

The real economy is additionally weakening. Manufacturing PMI declined to 52.8 in August, its lowest since August 2021. New orders have softened, and steel production expansion has slowed to 0.3%. Airline traffic, FASTag collections and cargo volumes are down. Urban wage expansion has slowed and consumer sentiment has worsened.

Rural India offers little offset. Reservoir marks are at 68% of capacity, against 83% a year ago. Food inflation has risen to 5.7%, and overall CPI is at 4.8%, the highest since January 2025. Large government foodgrain stocks give some protection against a weak monsoon, but the broader rural picture has deteriorated.

Credit expansion, led by industry and services, and passenger vehicle sales stay bright spots. Even so, BNP Paribas sees limited room for comfort: high inflation and the fading effect of earlier GST rate cuts could slow high-frequency indicators further over the upcoming months.