Authors: Dhruv Anand
India’s foreign exchange reserves rose $8.2 billion in the week of June 5 and has now crossed the milestone $500 billion mark for the first time in country’s history.
The healthy surge in the forex kitty was largely on the back of capital raising rounds by Reliance and Kotak Mahindra as the foreign currency asset held by the Reserve Bank of India rose $8.4 billion and stood at a record $463 billion in the reporting week, data released by the central bank on Friday showed.
The healthy surge in the forex kitty was largely on the back of capital raising rounds by Reliance and Kotak Mahindra as the foreign currency asset held by the Reserve Bank of India rose $8.4 billion and stood at a record $463 billion in the reporting week, data released by the central bank on Friday showed.
Why are forex reserves rising despite the slowdown in the economy?
The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had acquired stakes in several Indian companies in the last two months. According to the data released by RBI, while the FDI inflow stood at $4 billion in March, it amounted to $2.1 billion in April.
Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totalling Rs 97,000 crore.
On the other hand, the fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion. The months of May and June are expected to show further decline in dollar outflows.
What does the RBI do with the forex reserves?
The Reserve Bank functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government. The RBI allocates the dollars for specific purposes. For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $250,000 every year. The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.
Conclusion:-
Therefore the rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21.
It’s a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year. The rising reserves have also helped the rupee to strengthen against the dollar. The foreign exchange reserves to GDP ratio is around 15 per cent. Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.
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