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Current Affairs

Forex reserves soar despite negative GDP growth

Date: 05 January 2021 Tags: Economic Planning

Issue

India’s foreign exchange reserves have zoomed by over $103 billion in the current fiscal. It looks all set to surpass the all-time-high increase of $110.5 billion recorded in 2007-08.

 

Details

  • In 2007-08, the economy was booming, registering a gross domestic product growth of 9.3 percent on top of 9.6 per cent and 9.5 per cent in the preceding two years.

  • The Centre’s fiscal deficit, too, was a mere 2.5 percent of GDP. India could, then, easily withstand the shock from the global economic crisis that followed one year later.

  • The economy, by contrast, has contracted by 14.9 percent year-on-year in April-September 2020-21 and the RBI expects growth for the whole fiscal to be -7.5 per cent.

  • The most optimistic projection of the Centre’s fiscal deficit for 2020-21 is at 6.5-7 per cent of GDP (as against the budgeted 3.5 per cent).

 

Reasons for forex growth

  • The forex reserve accumulation in 2020-21 has been driven mainly by the country’s current account balance turning positive at $34.7 billion during April-September. 

  • Foreign portfolio investors, too, have pumped $28.65 billion into Indian equity and debt markets so far this fiscal.

  • The current account surplus has also been supplemented by some foreign capital inflows. Reliance Industries alone attracted global investments aggregating $27 billion in its Jio Platforms digital and retail businesses.

  • The 10-year US treasury yields currently at 0.91 percent, 0.19 percent for UK, 0.01 percent for Japanese, and minus 0.58 percent for German government bonds of the same tenure.

  • The investors are being pushed to seek returns in emerging market economies offering relatively higher returns.