IBEF: June 16, 2020
India’s foreign exchange reserves increased by US$ 8.2 billion in the week of June 5 and now crossed the milestone US$ 500 billion mark for the first time in country’s history.
As per the data released by the central bank, the healthy surge in the forex 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 increased by US$ 8.4 billion and stood at a record US$ 463 billion in the reporting week.
Foreign currency assets include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in the reserves. India has seen an increase in the foreign reserve since over a year and has overtaken Russia and South Korea emerging as the third-biggest holder of forex reserves only behind China and Japan.
“We feel that the inflows coming in on account of Foreign Direct Investment and debt raising exercises by domestic financial institutions and Non-Banking companies would have largely contributed to the surge in inflow,” Mr Saugata Bhattacharya is the Chief Economist at Axis Bank.
“In times like this, the news is a significant psychological milestone. Rating agency S&P’s decision earlier this week to not downgrade India’s sovereign rating and outlook is also expected to improve the foreign fund flow from global investors,” he added.
The main objective of RBI's reserve management policy is liquidity and safety of reserves.
A strong funding allows the central bank to timely intervene in forward and spot currency markets to arrest any slide in rupee devaluations. For example, the integration of reserve with the central bank and subsequent interventions helped the rupee recover by around two per cent from a record low of 76.92 witnessed in April 2020. Since then, INR has been quite strong, trading in the range of 75-76.
“Something which have differentiates our reserves from China and Japan is the sporadic FDI inflows and contribution of inward remittances. However, over the recent months, capital inflows to some of the largest corporates have indicated that not just sunrise sectors but even the mature industries are finding interest among global investors,” said Mr K Harihar of First Rand Bank.
The latest RBI data showed, other components of India’s foreign reserves such as its reserves held in gold declined by US$ 329 million in the reporting week and stood at US$ 32.35 billion. Similarly, SDR and central bank’s reserve position at IMF stood at US$ 1.4 billion and US$ 4.2 billion respectively, in this period.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.