India's Foreign exchange reserves is likely to hit the $500 billion mark soon. [ Part - I ]

India's Foreign exchange reserves is likely to hit the $500  billion mark soon.

                               

The increasing Foreign Exchange Reserves is a masterstroke to tackle any kind of crisis on the economic front. It is sufficient enough to cover import bill for a year.

We are currently at a point where India's GDP is in the I.C.U, Manufacturing sector and trade is standstill but the Foreign Exchange Reserves are increasing rapidly and likely to hit the $500 billion mark very soon despite of raging Covid-19 Pandemic. In the month of May Forex reserves jumped by $12.4 billion to an all time high of $493.48 billion.

What is Foreign Exchange Reserves or Forex Reserves?

Foreign Exchange Reserves or Forex Reserves is Country's gold reserves, contributions made to the IMF and the FTP and all the foreign currency assets, denominated in USD, held by the Reserve Bank Of India. However, over 90% of the reserves comprise of different foreign currencies, but denominated in USD held by RBI. 

India's Forex reserves have risen from a modest level of $5 billion during 1991 to reach around $275 billion in 2013. It was $367.64 billion in 2016 and $386.4 billion in 2017. In the month of May Forex reserves jumped by $12.4 billion to an all time high of $493.48 billion.

Amongst the emerging economies China has reserves of $3.10 trillion, Japan $1.5 trillion, Switzerland $848.39 billion, Russia $563.30 billion.

What is Significance of Forex Reserves?

• As economies pursue open policies, with large cross-border inflows and outflows, it provides a buffer against global fallouts and prevents currency crisis like situations.
• It helps economies to provide import cover, not met out of inflows, ensuring smooth imports, in terms of domestic requirements.
• It is helpful for economies to retire their high cost foreign currency debt or in meeting short term foreign currency debt.

• It increases international credibility and stature of economies.
• It gives the freedom to run higher current account deficits which could otherwise become a limiting factor for open economies.
•  It strengthens the confidence of the government for greater openness of economies and bolder reforms.
• Its importance also lies as fundamental requirement for emerging economies by providing them a hard currency. 

Why are Forex Reserves rising now?

Usually the increase in Foreign Exchange Reserves happens when there is increase in Investment in foreign portfolio investment in Indian stocks and Foreign Direct Investments (FDI).

In the last two months stakes of many Indian Companies were acquired by several Foreign Investors. Foreign Portfolio Investors (FPI) pulled out Rs. 60,000 crore each from debt and equity segments in March. They expected a turnaround in the economy later this financial year. But now they have returned to the Indian markets and bought stocks over $2.75 billion in the first week of June. Reliance Industries subsidiary, Jio Platforms has witnessed a series of Foreign Investments totaling Rs. 97,000 crore.

Other important reasons, Oil import bill, which is a huge foreign exchange have fallen due to subsequent fall in the crude oil prices.

Overseas Remittances and Foreign travel has fallen steeply in these months resulting minimum Dollar outflow.

 

How can India Utilize Forex Reserves?

In case of India, There is a major limitation in the use of reserves, in that They can be utilized only in foreign currency and cannot be converted into home currency. Any conversion into home currency would increase liquidity and be inflationary in nature.

• The Reserve Bank act as the Custodian and manager of Forex reserves.
• Under the Liberalized Remittances Scheme, Individuals are allowed to remit up to $250,000 every year.  
• R.B.I uses its Forex kitty for the orderly movement of the Rupee. It sells the Dollar when the Rupee weakens. and buys Dollar When the Rupee strengthens.
• It can be used to liquidate external debt.
• The R.B.I cannot lend commercially as it being a central bank can lend only to banks, which if done, will seep into the economy and can create inflationary pressures.

Can India's Reserves accumulation be said to be "Sufficient" for warding off any crisis?

crisis, can it be tackled with reserves

We all know, that crisis are known for their unpredictability and their magnitude of impact or the extent of damage they could inflict upon economies and variables. It is also about the government's perception about sufficiency seen qualitatively rather than quantitatively. Each of these successive crisis has only raised the bar of sufficiency of reserves.

However, over a period of time, with experience gained, it has now been possible to prescribe some international benchmarks to gauge sufficiency of reserves, especially for the emerging economies like India.