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Current Affairs

Reasons for increase in India’s FOREX reserves

Date: 15 June 2020 Tags: Monetary Policy & RBI

Issue

India’s forex reserves have crossed $500 billion for the first time ever in the week ended June 5, 2020. India can now depend on its soaring foreign exchange reserves to tackle any crisis on the economic front. 

 

Background

While the situation is gloomy on the economic front with GDP set to contract for the first time in 40 years and manufacturing activity and trade at standstill, this is one data point that India can cheer about amidst the Covid-19 pandemic.

 

Details

  • Forex reserves are external assets in the form of gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the Reserve Bank of India.

  • The International Monetary Fund says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.

  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

  • The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).

  • Foreign investors had acquired stakes in several Indian companies in the last two months. While the FDI inflow stood at $4 billion in March, it amounted to $2.1 billion in April.

  • After pulling out Rs 60,000 crore each from debt and equity segments in March, Foreign Portfolio Investments (FPIs) have now returned to the Indian markets and bought stocks worth over $2.75 billion in the first week of June.

  • Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totalling Rs 97,000 crore.

  • On the other hand, the fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion. 

 

Significance of rise in FOREX reserves

  • The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21.

  • The rising reserves have also helped the rupee to strengthen against the dollar. The foreign exchange reserves to GDP ratio is around 15 per cent.

  • Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.