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India’s $538 bn forex enough to cover over 95% of its external debt

India’s current $538 billion foreign exchange reserves can comfortably cover over 95 per cent of its outstanding external debt, something that will give a huge sentiment boost. Globally, India stands fourth in terms of forex reserves and second only to China in terms of debt coverage ratio—a measurement of the repayment ability.

The country’s forex reserves have swollen by a whopping $76 billion in 2020 alone, of which $63 billion has come in since April this year. Over $100 billion has come into the forex kitty in the last one year.

However, with rising global oil prices and imminent increase in imports, as economic activities pick up momentum, the reserves could show signs of easing in the coming months.

A State Bank of India (SBI) report said that the current level of foreign exchange reserves is sufficient to meet any external debt obligations. According to brokerage firm Anand Rathi, the present level of forex reserves covers 96 per cent of India’s outstanding external debt and is sufficient to handle imports for over 16 months. The forex reserves are also enough to cover 127 per cent of net international liabilities. “All these are near their life-highs and compare favorably with peers,” the brokerage firm said.

In June India’s forex reserves crossed the $500 billion mark for the first time.

The rise in reserves is primarily led by valuation gain, inflow of foreign institutional investment and forex intervention by the Reserve Bank of India.

Besides, India and other countries including Switzerland, Japan, South Korea and China have also seen a healthy surge in their forex reserves since the outbreak of the coronavirus pandemic.

While the high forex reserves act as a cushion and provides the necessary resilience, it also increases the overall cost. An expert on condition of anonymity told IN that the RBI must monitor closely to ensure that the reserves do cross the threshold.

Despite the high reserves, the Indian rupee, which is currently hovering around 73 to a dollar level, has not shown any appreciation. An expert, who refused to be quoted said that this could be due to RBI intervention.

“We must remember that there is also a cost attached to high reserves and we need to be watchful of that, it is important to have healthy forex reserves but unnecessary rise can lead to other problems and will also push the cost of maintaining such reserves,” he said..