In the midst of the covid-19 pandemic, India’s foreign exchange (forex) reserves have been rising at a very rapid pace and have touched a new high, in absolute numbers almost every week. What does this mean in the overall context of the Indian economy? Mint takes a look.
How fast has India’s foreign exchange reserves risen?
Between March 27 and August 14 this year, foreign exchange reserves rose 12.6% to $ 535.25 billion. Interestingly, in a similar period in 2019, foreign exchange reserves rose by only 4.5% to $ 430.5 billion. It is clear that there has been a very rapid increase in the country’s foreign exchange reserves since the end of March, after the negative economic impact of the coronavirus pandemic was first felt. Some economic and political commentators have tried to pass on this increase as evidence of improvement in the overall economy. But there is much more than meets the eye.
What does this jump in foreign exchange reserves mean?
A large part of the foreign exchange reserves is used to pay for imports. Imports of goods between April and July fell 46.7% to $ 88.9 billion. Therefore, smaller reserves have been used to pay for imports. This essentially shows a decline in economic activity since the start of the closure. India imports a large portion of the crude oil it consumes. During the first four months of the current financial year, the country imported about 82% of the total oil it has consumed. Nevertheless, total imports of oil and oil products fell by 55.9% to $ 19.6 billion, which is a clear effect of the closure.
So how has this affected foreign exchange reserves?
While imports fell 46.7% in the first four months to $ 88.9 billion, merchandise exports fell 30.3% to $ 74.9 billion. Therefore, the trade deficit, the difference between imports and exports, fell by 76.5% to $ 14 billion against 59.4 billion last year. This $ 14 billion difference was more than offset by other sources pushing up the reserve.
What other sources have supported reserves?
In addition to reduced imports, there are other factors that have pushed up foreign exchange reserves. As the price of gold has risen between March 27 and August 14, the value of gold held by the Reserve Bank of India (RBI) has jumped by 21.7% to $ 37.6 billion. Clearly, not only individuals have benefited from owning gold as it has happened, RBI has also gained. Beyond this, with people not leaving India for vacation, business travel or education, the demand for foreign currency while traveling abroad has beaten.
Do foreign investors have a role to play?
Foreign institutional investors (FIIs) bring in money primarily in dollars. These dollars must be exchanged for rupees before they can be invested. Between April 1 and August 24, FIIs have just invested ₹77,779 crore in Indian stocks. Provided a dollar is worth it ₹75, this means that FIIs have brought in more than $ 10 billion this year to India and this has ended up with RBI as foreign exchange reserves.
Vivek Kaul is the author of bad money.