India Forex Reserves: $ 600 Billion and Account …
India’s foreign exchange broke the $ 600 billion mark, aided by the pandemic year when a slush of global liquidity shifted to emerging markets in search of yield.
The result was that most emerging markets, including India, saw their foreign exchange reserves build up as central banks bought dollars to avoid a sharp appreciation in local currencies.
India’s foreign exchange reserves reached $ 605 billion for the week ending June 4, 2021, from $ 598 billion the week before. Reserves have increased by nearly $ 130 billion since the end of March 2020, when the Covid crisis accelerated around the world, prompting central banks to release a wall of liquidity to stabilize economies.
While India was a big beneficiary of dollar flows, it was not the only one. Yet India’s reserve accumulation is among the strongest of the emerging economies.
Reserves have jumped by more than $ 140 billion since late 2019, recording one of the highest increases in Asia outside Japan, said Radhika Rao, an economist at DBS Bank.
Even as a percentage of GDP, India’s reserve accumulation is among the highest among emerging economies, according to data from the Institute of International Finance. In 2020, for which comparable data are available, India’s foreign reserve accumulation stood at 4% of GDP. It is the fourth largest after Taiwan, Hungary and the Philippines.
The numbers are large but not unusual for Asia, where many countries have traditionally handled exchange rates heavily to prevent appreciation and boost exports, said Sergi Lanau, deputy chief economist at the Institute of International Finance. .
In absolute terms, India has the fifth largest pool of foreign exchange reserves.
More than adequate
At current levels, reserves are more than sufficient by most traditional measures.
Reserves are now sufficient for more than 15 months of imports based on average monthly imports in FY20, before the pandemic struck.
They represent 1.1 times India’s external debt, which stood at $ 563.5 billion in December 2020.
The idea with reserves is to have enough to finance current account deficits and the amortization of external debt in times of crisis, Lanau said. How much does it take for this is a subjective political decision, he said.
The cost of having lots of reserves manages their impact on domestic liquidity, Lanau added.
When the RBI buys dollars, it puts more rupees into the system, which must be mopped up to keep money market rates close to the policy rate corridor. “The RBI did it in the (rupee) futures market, pushing up rates, discouraging companies from hedging their forex exposure,” Lanau said.
On any measure of external vulnerability, India ranks highly relative to its emerging market peers, said Madhavi Arora, chief economist at Emkay Global. However, Arora also said that the negative byproduct of such an accumulation of foreign exchange reserves has been excessively low short-term rates at certain times.
With reserves at levels deemed more than adequate, will the RBI be less aggressive in buying foreign currency?
DBS Bank’s Rao doesn’t think so.
Recent political comments suggest that increasing reserves is a priority for the central bank, she said. “This suggests that there is not necessarily a threshold that they seek to meet, but deem it necessary to strengthen that cushion at least for the duration of the ultra-lax global policies, which have resulted in strong inflows into the countries. emerging market assets, including India.
Composition of reserves
The sharp increase in reserves due to foreign currency inflows has meant that the share of gold in India’s reserves has steadily declined.
Gold reserves as a percentage of foreign exchange reserves have remained in the 5-7% range since 2016, according to RBI data. Gold made up 6.2% of total foreign exchange reserves, according to data for the week ended June 4, 2021.
The central bank bought gold, as well as gains in valuing its existing gold reserves, Bajoria said. Amid the pace of capital flows in the economy, the decision to allocate gold is made on a periodic basis rather than a regular basis, he said. It’s an asset allocation choice, he said.