India’s forex reserves have been a cause of concern for several weeks now, as the country was facing a four-week losing streak in its forex reserves. However, there is a reason to celebrate now, as the country’s forex reserves have risen by $1.62 billion in the week ended on March 26, 2021, snapping the losing streak.
India’s forex reserves have touched a record high of $582.4 billion in the week ended on January 8, 2021. However, since then, the country has been facing a downfall in its reserves, with a major outflow of foreign currency in the end of February and the first week of March.
The country faced a total outflow of $3.47 billion in the week ended on March 5, which was the second-highest loss in a week in the fiscal year 2021. The previous week witnessed an outflow of $2.05 billion. The overall outflows in the month of February were $6.21 billion, which was driven mainly by portfolio investment outflows of $5.14 billion.
The reason behind the fall in forex reserves was the increase in dollar purchases by the Reserve Bank of India (RBI) in order to control the appreciation in the rupee value. The rupee has been appreciating against the US dollar since mid-2020, which has been a concern for the RBI in order to maintain the competitiveness of Indian exports.
However, the recent rise in forex reserves indicates that the RBI has been successful in controlling the appreciation in the rupee value, despite the outflows. The central bank has been following a policy of intervention in the foreign exchange market, in order to maintain a certain level of exchange rate stability.
The rise in forex reserves also indicates the strong inflow of foreign money into the Indian economy, despite the ongoing pandemic situation. The foreign investors have been bullish on the Indian economy, despite the negative impact of the pandemic on the country’s economic growth.
In the last few months, the Indian government has also implemented several measures to attract foreign investments into the country. The government has relaxed FDI norms, announced production-linked incentives (PLI) schemes for various sectors, and has also launched the National Infrastructure Pipeline (NIP) with a budget of Rs 102 trillion ($1.4 trillion).
The strong forex reserves also provide a cushion to the country’s external vulnerabilities, particularly the current account deficit. The current account deficit is the difference between the country’s exports and imports of goods, services, and transfers. A high current account deficit makes the country vulnerable to external shocks, such as a sudden outflow of foreign capital.
Moreover, the rise in forex reserves also provides a cushion to the country’s external debt servicing requirements. India’s external debt stood at $556.8 billion in the end of December 2020, which included $107.1 billion of short-term external debt. The rise in forex reserves reduces the pressure on the country’s external debt repayment and provides more resilience to the economy.
The rise in forex reserves is also a positive indicator for the Indian capital markets. The strong forex reserves attract foreign investors to the Indian capital markets, as it assures them of the country’s ability to manage the currency volatility risks. The rise in forex reserves also strengthens the rupee, which is a positive for the Indian equities market.
Moreover, the strong forex reserves also provide the RBI with the ammunition to intervene in the foreign exchange market in case of any sudden volatility. The RBI has been very cautious in its intervention policy, as it does not want to be seen as a currency manipulator. However, if any sudden volatility arises, the strong forex reserves provide the RBI with enough firepower to manage the situation.
In conclusion, the recent rise in forex reserves is a positive for the Indian economy. It indicates the strong inflow of foreign money into the country, provides a cushion against external vulnerabilities, and strengthens the rupee. The Indian government and RBI need to maintain the policy momentum in order to maintain the strong forex reserves and attract more foreign investments in the country.