India’s Forex Reserves Up Almost $3.5 Billion

India’s Forex Reserves Up Almost $3.5 Billion

Published: September 30th, 2020

 India’s foreign exchange reserves have surged by $3.378 billion for the week ending September 18. The rise is attributed to the swelling of foreign currency assets (FCA) which are a huge component of the reserves.

India’s forex kitty has increased by $3.378 billion during the third week of September 2020. The growth, mainly attributed to foreign currency assets (FCA), saw the Asian nation’s reserves stand at $545.038 billion, a lifetime record.

According to the Reserve Bank of India (RBI) data, the figures had declined in the previous week by $353 million to $541.660 billion. The numbers indicate that the increase has been due to the swelling FCA which makes a substantial part of the forex kitty.

India’s FCA increased by $2.943 billion in the week ending September 18, to stand at $501.464 billion, according to the RBI report. FCA factors are the effects of either the appreciation or depreciation of non-U.S. currency units held by the RBI such as the yen, pound and euro that make up the foreign exchange reserves.

In the same week of reporting, gold reserves slid by $580 million to settle at $37.44 billion. Meanwhile, the country’s special drawing rights as prescribed by the International Monetary Fund (IMF) climbed by some $1 million to stand at $1.483 billion.

India’s overall reserve position with the IMF also surged by $14 million to settle at $4.651 billion during the week in question, the data indicated.

According to RBI, the country’s bold forex reserves puts it in a safe place. The country’s central bank officials said that the soaring foreign exchange reserves give India a cushion which it can use in the short-term to sort out any economic crisis it may experience.

A Year of Records

The country’s foreign reserves past the $500 billion mark for the first time on June 5, 2020. During this record-shattering moment, India’s reserves broke the psychological ceiling to stand at $501.7 billion.

The current impressive figures stand in odd contrast with the situation back in 1991 when the populous Asian country was forced to pawn its gold reserves to fend off a major financial crisis. In March 1991, the country’s foreign reserves were a mere $5.8 billion.

At the moment, the forex reserves data seemingly is the only thing India can smile about. The overall economic situation is dire with the Gross Domestic Product (GDP) down some 24% for the second quarter of 2020. Besides, trade and manufacturing activity is at a standstill.

Therefore, the soaring forex reserves provide a solid cheer for the economy amid the gloom surrounding the COVID-19 pandemic in Narendra Modi-led India.

Forex Reserves Contextually

Forex reserves refer to external assets, often in the form of foreign currency assets such as foreign direct investment (FDI), external capital inflows into a country’s capital markets, and the special drawing rights a country deserves from the IMF. However, that is not all as the description may also include the actual external commercial borrowing and loan potential accumulated by a country and controlled by its central bank.

Through a handbook released in 2012, the IMF maintains that a country’s official foreign exchange reserves serve the purpose of supporting various objectives such as instilling and maintaining confidence in the state’s exchange rate management and monetary policies. The narrative adds that such purposes include determining the country’s ability to support both its national and union currencies.

In the case of India, the reserves also limit external vulnerabilities since they maintain the country’s foreign liquidity and absorb shocks during economic crises or when the country’s ability to borrow is curtailed.

Shaktikanta Das, the governor of RBI, said that India’s forex reserves are rising despite the gloomy economic climate because his country has experienced an increase in foreign portfolio investment in Indian stocks. He added that such investors anticipate a quick turnaround in the economy sometime later this year. He reiterated that such optimism is bringing more investment to the Indian market.

Foreign Exchange reserves and India’s Debt Management Policy

Towards the end of Q1 of 2020, India pulled out Rs 120,000 crore (Approx. $16.3 billion) from its debt and equity segments. Now, the Foreign Portfolio Investments (FPIs), expecting a decent turnaround in Q4 of 2020, are trooping back to the country’s market.

However, the governor said that the immigration back into the Indian markets is not the only reason the forex reserves are posting impressive figures. According to him, the decline in crude oil prices implies that India’s oil import bill has dropped substantially, thus saving the country a significant amount in precious foreign exchange.

Similarly, the governor added, foreign travel has also dropped by a huge margin, as have overseas remittances. He noted that the foreign reserves started rising sharply soon after India’s finance minister, Nirmala Sitharaman, announced corporate tax cuts on September 20, 2019.

Shaktikanta said that India’s rising forex reserves give RBI the comfort of managing the country’s internal and external financial issues when the entire globe’s economy is contracting because of the current health crisis. The banker said that the surging reserves can now cover India’s entire import bill for the year.

He added that the rising reserves have stabilized the rupee against major currencies. The reserves to the GDP ratio now stands at an impressive 15%.

Economists said the RBI has used the reserves to create an artificial price action of the rupee. Abhishek Goenka, the CEO and head economist of IFA Global, noted that despite the dollar’s extended weakness, the RBI does not seem keen on pulling its feet off the reserve accumulation pedal.

He noted that the RBI’s action has skewed the rupee’s sentiment.

Final Thoughts

India’s forex reserves surged by almost $3.5 billion in just a week to hit a record high of $545 billion. The milestone comes only about 3 months after the country hit another record that took its reserves above $500 billion. The country’s central bank governor maintains that the situation will help the country weather any approaching economic troubles.

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