India Must Build Strategic Reserves: EY's Warning on Global Risks

EY Flags Reserve-Building as Urgent Priority

India faces mounting pressure to accelerate the accumulation of strategic reserves as geopolitical tensions intensify across the globe. An Ernst & Young (EY) report has highlighted the critical importance of bolstering both foreign exchange reserves and commodity stockpiles to insulate the economy from external shocks and supply-chain disruptions that could derail growth.

The warning comes at a time when India's external position remains broadly stable, but rising uncertainty in global markets—from energy prices to trade flows—has prompted economists and policy institutions to advocate for a more defensive posture. The EY analysis underscores how geopolitical volatility can quickly translate into currency pressures, inflation spikes, and reduced capital inflows, making reserve adequacy a cornerstone of macroeconomic resilience.

Why Strategic Reserves Matter Now

Shielding Against External Shocks

India's economy, despite being largely domestically driven, remains exposed to global commodity prices—particularly oil and metals—and foreign investment flows. A deeper reserve buffer would allow the Reserve Bank of India (RBI) to intervene more effectively in currency markets, stabilise the rupee during volatile periods, and maintain import cover without relying heavily on short-term borrowing.

The EY report argues that adequate reserves provide a safety net during balance-of-payments stress, reducing the need for hasty policy corrections that can disrupt domestic activity. Given India's current account dynamics and the volatility of portfolio capital flows, maintaining reserves equivalent to 8–10 months of imports—a commonly cited benchmark—offers meaningful protection.

Supply-Chain Resilience

Beyond traditional foreign exchange reserves, the report emphasises the need to build strategic commodity reserves—especially energy and critical minerals. Global supply-chain disruptions, whether from geopolitical conflict, natural disasters, or trade restrictions, have exposed how dependent India is on stable access to essential inputs.

A robust commodity stockpile strategy would reduce India's vulnerability to sudden price spikes or supply cuts, allowing businesses to plan with greater confidence and cushioning households against inflationary shocks. This is particularly relevant for energy security, where even modest supply disruptions can cascade through the economy.

Current Reserve Position and Gaps

India's foreign exchange reserves have grown substantially over recent years, reflecting strong export performance and remittance inflows. However, the EY report suggests that the present reserve levels, while adequate by historical standards, may not be sufficient to weather a severe external shock or prolonged geopolitical crisis.

The RBI has been mindful of reserve accumulation, using interventions in the forex market to prevent excessive rupee appreciation while building the buffer. Yet the report calls for a more deliberate, forward-looking strategy that anticipates potential risks rather than merely reacting to them.

Commodity reserves present an even starker gap. Unlike countries such as China and the United States, which maintain substantial strategic petroleum reserves, India's public commodity stockpiles remain modest relative to consumption. Expanding these reserves requires capital investment and long-term planning but offers tangible insurance against supply shocks.

Policy Recommendations and Implementation

Coordinated Fiscal and Monetary Strategy

The EY report advocates for closer coordination between the Ministry of Finance, the RBI, and sector-specific regulators to build reserves in a systematic and cost-effective manner. Rather than ad-hoc accumulation, a structured approach—with clear targets, time horizons, and funding mechanisms—would maximise efficiency and avoid crowding out other productive investments.

One avenue is to channel a portion of government revenue surpluses into reserve accumulation during periods of strong growth, building buffers during good times to deploy during stress. Alternatively, dedicated fiscal allocations for strategic commodity reserves, similar to the food security mandate, could ensure consistent progress.

Diversification and Asset Allocation

The report also recommends diversifying the composition of foreign exchange reserves—holding not just dollars but also other major currencies and gold—to reduce concentration risk and hedge against currency depreciation. Gold reserves, in particular, offer protection against inflation and currency instability, and India's position as a major gold consumer and holder makes expansion of gold reserves strategically sound.

For commodity reserves, a phased approach targeting oil, liquefied natural gas (LNG), and critical minerals such as lithium, cobalt, and rare earths would align with India's energy transition goals while securing industrial inputs for manufacturing growth.

Broader Economic Implications

Reserve building, done correctly, need not constrain growth. By reducing macroeconomic uncertainty and lowering the risk premium on Indian assets, stronger reserves can actually support investment and consumption. Foreign and domestic investors are more confident deploying capital in economies perceived as resilient and well-prepared for shocks.

The EY analysis also touches on the fiscal cost of reserve accumulation. Holding commodities or foreign currency incurs costs—storage, insurance, opportunity cost of capital—but these are outweighed by the benefits of reduced vulnerability and faster economic recovery from crises.

For policymakers, the message is clear: the global environment is increasingly unpredictable, and hope is not a strategy. India's sustained growth and rising geopolitical role make it a target for external pressure. Investing in reserves—both financial and physical—is an investment in economic sovereignty and the ability to pursue policies in India's national interest, even amid global turmoil.

The EY report ultimately calls for a long-term, deliberate approach to reserve building that treats it not as a cost to growth but as essential infrastructure for it. As global tensions persist, the case for such action has never been stronger.