India’s foreign exchange reserves, hit by Covid, jumped from a record $ 11.9 billion during the week ends July 31 to a new high of $ 534.5 billion, which makes it the fifth largest reserve holder in the world. During the 10-month period from September 27, 2019 to July 31, 2020, foreign exchange reserves increased by $ 100 million. At a time when the economy is under strain and expected to be contracted in 2020-2021, , the rising forex reserves have come as a breather as it can cover India’s import bill of more than one year.
India’s Reserves of Change: How Has It Been?
- The trend for change began after Finance Minister Nirmala Sitharaman announced a sharp reduction in the corporate tax on September 20, 2019.
- All investor sentiment is weakened after the announcement of Budget in July of the imposition of a higher surtax, the government’s decision to cancel its budget The decision concerning a higher impact of the surtax on REITs, including a reduction in the corporate tax rate in September played an important role in the renewal of the investment humidity and the incentive to invest in Indian economic growth.
- Between September 20, 2019 and July 31, 2020, reserves increased by $ 106 billion, and since the beginning of April they have increased by $ 60 billion.
- Thus, in ten months, India added 25% of the reserves it had until September 20, 2019.
- India is now fifth in the world ranking behind China ($ 3.298 million), Japan (1.383 million dollars). dollars) and Switzerland (896 billion dollars) and Russia (591 billion dollars).
What is driving this increase in foreign exchange reserves?
The hike is being done in several stages and has been driven by different factors over the past ten months. Experts have disputed that the rise in vises inflows through Foreign Portfolio Investment (FPI) and Directed Foreign Investment (FDI) to has also been supported by the decline in the import bill over the past 4 to 5 years due to falling crude prices and the impact on trade Covid19 pandemic.
Some of the key factors include
- FPI Tickets: So that celebrates the start of a surge in the FPI following entries to the government’s September decision to cut the corporate tax rate. Between April and December 2019, the REIT injected $ 15.1 billion net, it was the RBI.
- Declining crude oil prices: India’s oil import bill has as the global spread of the coronavirus since February 2020 has not only rocked the stock markets, but has led to a collapse in Brent crude oil prices. While crude accounts for 20% of India’s total import bill, the price of Brent crude oil has fallen to $ 20 will see the end of March, they have fallen further and traded between $ 9 and $ 20 in April. In January 2020, Brent was trading between $ 60 and $ 70 in Barrel.
- Import economics: lockdown in all countries in response to the Covid-19 pandemic to impact global trade and to enter sharply lower import spending – electronics, or and crude oil prices, among others .
- FDI inflows: between September 2019 and March 2020, foreign direct investments amounted to 23.88 billion dollars and in April and May, to 5.9 million dollars. Market experts disagree that a lot of ideas also came in June and July, especially the amount of Rs 1 lakh plus the investment of the tech worlds giants in Jio platforms. Thus, the inflows of FDI have widened I have contributed to the increase in reserves of change.
- Declining Gold Imports: Gold, which is an important component of imports for India, saw a sharp decline in the firm quarter in June 2020 following high prices and the panemia-induced foreclosure of COVID-19 [FEMALE. According to the World Gold Council (WGC), gold imports fell 95 percent to 11.6 tonnes in the quarter, from 247.4 tonnes in the same period there and a reason for logistics and demand issues. ineffable. The value of trading during the June quarter is Rs 26,600 crore, at a rate of 57% for Rs 62,420 crore and a year, a WGC statement.
- FDI inflows: between September 2019 and March 2020, foreign direct investment amounted to 23.88 billion dollars and in April and May it was 5.9 billion dollars. Market experts say that a large amount of FDI also occurred in June and July, especially Rs 1 lakh crore plus investment from global tech giants in Jio platforms. Therefore, FDI inflows have contributed greatly to the increase in foreign exchange reserves.
- Decline in gold imports: Gold, which was a major component of India’s imports, experienced a sharp decline in the quarter ending June 2020 following high prices and lockdown caused by the COVID-19 pandemic . According to the World Gold Council (WGC), gold imports fell 95 percent to 11.6 tonnes in the quarter from 247.4 tonnes in the same period a year ago due to logistical problems and low demand. The value of gold traded in the June quarter fell to 26,600 crore rupees, down 57% from 62,420 crore a year ago, WGC said.
What does the increase in foreign exchange reserves mean?
- The increase in foreign exchange reserves offers the government and the Reserve Bank of India much comfort in dealing with India’s external and internal financial problems at a time when economic growth is expected to contract by 5, 8% in 2020-2021.
- It is a great cushion in an economic crisis and enough to cover the country’s import bill for a year. The increase in reserves also helped the rupee to strengthen against the dollar.
- The ratio of foreign exchange reserves to GDP is around 15 percent. The reserves will give the markets a level of confidence in the ability of a country to meet its external obligations, they will demonstrate support for the national currency through external assets, they will help the government to satisfy its foreign exchange needs and debt obligations. and maintain a reserve for national disasters or emergencies.
- “Adequate foreign exchange reserves should allow the RBI to cut rates and support the recovery. We estimate that the RBI can sell $ 50 billion to defend the rupee in the event of a speculative attack. It should be noted that the RBI’s action to support growth should attract the flow of capital from REIT, ”said a Bank of America report.
What does the RBI do with foreign exchange reserves?
- The Reserve Bank functions as a custodian and administrator of foreign exchange reserves and operates within the framework of the general policy agreed with the government.
- The RBI allocates dollars for specific purposes. For example, under the liberalized remittance program, people can send up to $ 250,000 per year.
- The RBI uses its forex kitty for the orderly movement of the rupee. Sell the dollar when the rupee weakens and buy the dollar when the rupee strengthens.
- Recently, the RBI bought dollars in the market to consolidate foreign exchange reserves. When the RBI absorbs dollars, it releases an equal amount in rupees.
- This excess liquidity is sterilized through the issuance of bonds and securities and LAF operations to avoid an increase in inflation.
Are Foreign Reserves Profiting India?
- Only the gold reserves gave India great benefits. Although the RBI did not disclose actual returns on foreign exchange reserves, experts believe that India is likely to get only negligible returns, with interest rates in the United States and the Eurozone around about 1%.
- On the contrary, India could face a cost to retain reserves abroad. Of the total foreign exchange holdings, 59.7% were invested in securities abroad, 33.37% were deposited with other central banks in other countries and the BIS, and the remaining 7.06% included deposits in banks commercials abroad in March 2020.
- Also, at the end of March 2020, the RBI had 653.01 tons of gold, of which 360.71 tons were abroad in a safe place with the Bank of England and the Bank for International Settlements. while the remaining gold remains at the national level.
- With gold prices soaring 40 percent to over 55,000 rupees per 10 grams this year, the value of gold holdings has skyrocketed.