INDIA’S $513.25 BILLION FOREX RESERVES

Currently India is 5th on the list of the world’s largest foreign exchange reserves, after China, Japan, Switzerland and Russia. The components of forex reserves like foreign currency assets ($463 bn), gold ($32 bn) and reserve position ($14bn) are at an all time high. This gives rise to the question,

Why is the forex increasing despite of the worldwide economic slowdown?

A few of the reasons could be as follows:

1. High amounts of FPI and FDI. The amount of FPI on the 1st week of June came to a total of $2.75 billion. JIO alone has contributed to this by showing an investment of around Rs. 97,000 crore ($ 16 billion), through all the different companies that have been investing in its platforms since Facebook’s initial investment for a stake of 9.99%. The amount of foreign direct investment has been $4 billion in March alone and fallen to approx $2 billion in April. The stock market of India has also seen a recent rise because of the amount of foreign investment and so positive market sentiments thus developed have helped further the cause.

2. The cost of crude oil has dropped significantly recently and so this has in turn brought down the oil import bills and thus saving the country’s forex.

3. Because of the foreign travel ban, the amount of dollars or any kind of foreign currency being spent has gone down drastically.

4. On 20th September, 2019, the percentage of corporate tax was decreased by our finance minister, Mrs. Nirmala Sitharaman and this made India a better prospective for foreign companies to invest in. The foreign exchange reserves have grown by $73 billion because of this action.

How does forex help?

1. Forex is basically reserved money which can later be used for emergency purposes and gives the government something to fall back on. For eg: if there are any ventilators or medicines that need to be imported, due to our high amount of forex reserves, it will be easy for us to clear our dues in an efficient manner. In 1991 due to there being very less to negligible foreign reserves, the Chandrashekhar government had to airlift gold reserves from the Union Bank Of Switzerland so as to keep it as a collateral and thus get loans from the IMF.

2. Our Reserve to GDP is 15% which is high, and the higher the better in this case.

3. Recently Moodys brought the Indian sovereign bond rating down from BAA2 to BAA3 which is just one step above the junk bonds. High foreign exchange reserves will help gain confidence in the market and thus we can overcome the negative side that was displayed by the low ratings and this high reserve ensures that there will be no payment default on our sovereign bonds.

4. It has also helped strengthen the Rupee against the dollar. Let us understand this with the help of an example. Suppose, $1= Rs 57 and Rupee starts falling and reaches at a level of $1 = Rs 80, then, RBI can intervene and float $500 billion from their reserves in the market and thus increasing the amount of dollars in the market. Then, as the supply of $ increases, the demand for it goes down and as the supply of Rupee decreases, the demand goes up thus stabilizing the condition of Rupee.

Now the last but one of the most important questions come to mind, Where are the reserves kept?

• 64% of the reserves are held as treasury bills or T-Bills (mainly of USA).

• 28% are deposited in foreign central banks.

• 7.4% are deposited in foreign commercial banks.

• Indian reserve has 653.01 tonnes of gold as of March, 2020. Out of this, 360.71 tonnes are stored overseas in the Bank Of England and Bank For International Settlements.

• The remaining amount is held domestically.

• The returns on the forex kept in central banks and commercial banks is negligible, around 1% which is spent in the charge for gold storage.