PremiumAmple liquidity in the global financial system has prompted foreign investors to scan investment options in India. As a result of rising inflows into the stock market and FDI investments, India’s forex reserves have surged to over $600 billion. Is that comfortable enough?
Ample liquidity in the global financial system has prompted foreign investors to scan investment options in India. As a result of rising inflows into the stock market and FDI investments, India’s forex reserves have surged to over $600 billion. Is that comfortable enough?
The components of forex reserves
The forex reserves are assets held by the central bank and comprise foreign currencies, bonds, bank deposits, gold, special drawing rights and financial assets. Foreign currencies, the largest constituent of Indian forex reserves, are held in the form of treasury and institutional bonds. Forex reserves are a net of inflow and outflow through a country’s current and capital account, and need not necessarily be reflective of positive earnings of the country. With exporters and importers trading, remittances and FII/FDI investments in foreign currency flowing in and out, foreign currency is accumulated with the central bank.
The significance of forex reserves
Forex reserves are reflective of the stability and strength of the fundamentals of an economy. When RBI maintains adequate forex reserves, other countries are confident about its monetary and exchange rate management policies. It indicates a country’s capacity to pay for imports, especially crucial inputs such as crude oil and capital equipment. By maintaining liquidity in the form of foreign currency, it minimizes external vulnerability to crisis situations and helps absorb shocks. In 1991, when India’s forex reserves were barely enough to cover three weeks of essential imports, it had to borrow from IMF
Where does the country stand now?
With foreign exchange reserves increasing to $608 billion as of 11 June, India now has surpassed Russia (604.8 billion) to be in fourth position. The first three are China $3.4 trillion in May), Japan, and Switzerland. In May, India’s forex reserves stood at $598 billion. India is now followed by countries such as Russia, Taiwan, Hong Kong and South Korea.
What has been India’s journey like?
It’s been a long journey, and one that’s seen India strengthen its economic fundamentals. In 1991, India’s forex reserves stood at only $1.2 billion. Today, RBI’s position is relatively more comfortable, with forex reserves enough to cover 15 months of imports. A funda-mentally strong reserves position provides much confidence to foreign investors and credit rating agencies in the government’s ability to meet its debt obligations and the central bank’s capacity to insulate the economy from the downsides of any external shocks.
What does the existing scenario indicate?
Despite a recession, substantial fall in exports in FY21 and the export destinations’ poor economic performance, the rise in forex reserves indicates confidence in the Indian economy among foreign investors. A substantial rise in foreign investments has been the major factor behind recent surge in forex reserves. There need not be any nervous pangs amongst importers regarding crucial import requirements needed to kick-start economic revival.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH
