India’s foreign exchange reserves have increased by over $100 billion in the last one year. The reserves touched an all-time high of $534 billion for the week ended July 31—an increase of $12 billion in a week’s time. Globally, India now has the fourth largest forex reserves.
“The current level of foreign exchange reserves is sufficient to meet any external debt obligations,” a State Bank of India report said.
With a looming global recession in the wake of the coronavirus pandemic and unprecedented rise in economic uncertainty, high forex reserves act as a cushion to the country’s overall confidence in when it comes to macro-economic indicators including the ability to meet external obligation and cover the import bill. The high reserves also help in maintaining the value of the rupee while attracting foreign investors to park their money in the country.
However, the bad news is that there is a cost—which can be quite high depending on the quantum of reserves. The Reserve Bank of India (RBI) must ensure that the reserves do not swell beyond a threshold as that will add to the cost. “While this provides huge resilience to India’s external sector position, with low (often less than 1 per cent) yield, the cost of holding high forex reserves is rising,” said brokerage firm Anand Rathi.
In June, the forex reserves in the country for the first time, crossed the $500-billion mark.
The sharp fall in import bill has boosted the foreign exchange reserves coupled with large inflow of foreign direct investment (FDI) in the last four months. Earlier, Prime Minister Narendra Modi at a US-India Business Council summit said that India attracted the FDI worth $20 billion during April-July despite the pandemic. In 2019-20, FDI inflow into India was estimated at $49.97 billion.
The pandemic has also led to the narrowing current account deficit—the difference between the inflow and outflow of foreign currencies. Besides, foreign currency assets (FCA)—the most critical component of the overall forex kitty that is determined by the effect of appreciation or depreciation of currencies other than the US dollar such as the euro, pound or yen—have increased touched $491 billion.
India’s forex kitty also has gold reserves and special drawing rights (SDRs).
In the last six months, the Indian rupee has been trading at around 74-75 to a dollar..